JAY-Z TO LEAD FED
http://blogs.wsj.com/economics/2007/11/06/jay-z-the-new-alan-greenspan/
http://edition.cnn.com/video/#/video/business/2007/11/23/roth.us.poor.dollar.cnn

‘BROKEN WINDOWS’ THEORY AS APPLIED TO CURRENCY
http://www.flickr.com/groups/612007 [at] N21/pool/
http://www.monochrom.at/revaluation/


http://www.youtube.com/watch?v=OS2fI2p9iVs

IMPLODE-O-METER
http://ml-implode.com/
http://money.cnn.com/2007/11/12/real_estate/Cleveland_foreclosure_factors/?postversion=2007111415
http://www.modbee.com/business/story/120790.html

PREFACE (TENETS OF THE BORN-AGAIN DRUNK)
http://en.wikipedia.org/wiki/Twelve-step_program
These are the original Twelve Steps as published by AA
1. We admitted we were powerless over alcohol—that our lives had
become unmanageable.
2. Came to believe that a Power greater than ourselves could
restore us to sanity.
3. Made a decision to turn our will and our lives over to the care
of God as we understood Him.
4. Made a searching and fearless moral inventory of ourselves.
5. Admitted to God, to ourselves, and to another human being the
exact nature of our wrongs.
6. Were entirely ready to have God remove all these defects of
character.
7. Humbly asked Him to remove our shortcomings.
8. Made a list of all persons we had harmed, and became willing to
make amends to them all.
9. Made direct amends to such people wherever possible, except when
to do so would injure them or others.
10. Continued to take personal inventory and when we were wrong
promptly admitted it.
11. Sought through prayer and meditation to improve our conscious
contact with God as we understood Him, praying only for knowledge of
His Will for us and the power to carry that out.
12. Having had a spiritual awakening as the result of these steps,
we tried to carry this message to alcoholics, and to practice these
principles in all our affairs.

Other twelve-step groups have adapted these steps of AA as guiding
principles for problems other than alcoholism. In some cases the steps
have been altered to emphasize particular principles important to
those fellowships, or to remove gender biased or specifically
religious language. Twelve-step programs symbolically represent human
structure in three dimensions: physical, mental, and spiritual. The
disorders and diseases the groups deal with are understood to manifest
themselves in each dimension. For addicts and alcoholics the physical
dimension is best described by the “allergy-like bodily reaction”
resulting in the inability to stop using substances after the initial
use. For groups not related to substance abuse the physical
manifestation could be much more varied including, but not limited
too: agoraphobia, apathy, distractibility, forgetfulness,
hyperactivity, hypomania, insomnia, irritability, lack of motivation,
laziness, mania, panic attacks, poor impulse control, procrastination,
self-injury, suicide attempts, and stress. The illness of the
spiritual dimension, in all twelve-step groups, is considered to be
self-centeredness. This model is not intended to be a scientific
explanation, it is only a perspective that twelve-step organizations
have found useful.

The process is intended to replace self-centeredness with a growing
moral consciousness and a willingness for self-sacrifice and unselfish
constructive action. In twelve-step groups, this is known as a
spiritual awakening or religious experience. This should not be
confused with abreaction, which produces dramatic, but ephemeral,
changes. In twelve-step groups, “spiritual awakening” is believed to
develop, most frequently, slowly over a period of time.

THE 12 STEPS TO COLLAPSE
http://www.ft.com/cms/s/0/4d19518c-df0d-11dc-91d4-0000779fd2ac.html?nclick_check=1
America’s economy risks mother of all meltdowns
BY Martin Wolf  /  February 19 2008

“I would tell audiences that we were facing not a bubble but a froth –
lots of small, local bubbles that never grew to a scale that could
threaten the health of the overall economy.” Alan Greenspan, The Age
of Turbulence.

That used to be Mr Greenspan’s view of the US housing bubble. He was
wrong, alas. So how bad might this downturn get? To answer this
question we should ask a true bear. My favourite one is Nouriel
Roubini of New York University’s Stern School of Business, founder of
RGE monitor.
http://www.rgemonitor.com/blog/roubini/142759/

Recently, Professor Roubini’s scenarios have been dire enough to make
the flesh creep. But his thinking deserves to be taken seriously. He
first predicted a US recession in July 2006*. At that time, his view
was extremely controversial. It is so no longer. Now he states that
there is “a rising probability of a ‘catastrophic’ financial and
economic outcome”**. The characteristics of this scenario are, he
argues: “A vicious circle where a deep recession makes the financial
losses more severe and where, in turn, large and growing financial
losses and a financial meltdown make the recession even more severe.”

Prof Roubini is even fonder of lists than I am. Here are his 12 – yes,
12 – steps to financial disaster.

Step one is the worst housing recession in US history. House prices
will, he says, fall by 20 to 30 per cent from their peak, which would
wipe out between $4,000bn and $6,000bn in household wealth. Ten
million households will end up with negative equity and so with a huge
incentive to put the house keys in the post and depart for greener
fields. Many more home-builders will be bankrupted.

Step two would be further losses, beyond the $250bn-$300bn now
estimated, for subprime mortgages. About 60 per cent of all mortgage
origination between 2005 and 2007 had “reckless or toxic features”,
argues Prof Roubini. Goldman Sachs estimates mortgage losses at
$400bn. But if home prices fell by more than 20 per cent, losses would
be bigger. That would further impair the banks’ ability to offer
credit.

Step three would be big losses on unsecured consumer debt: credit
cards, auto loans, student loans and so forth. The “credit crunch”
would then spread from mortgages to a wide range of consumer credit.

Step four would be the downgrading of the monoline insurers, which do
not deserve the AAA rating on which their business depends. A further
$150bn writedown of asset-backed securities would then ensue.

Step five would be the meltdown of the commercial property market,
while step six would be bankruptcy of a large regional or national
bank.

Step seven would be big losses on reckless leveraged buy-outs.
Hundreds of billions of dollars of such loans are now stuck on the
balance sheets of financial institutions.

Step eight would be a wave of corporate defaults. On average, US
companies are in decent shape, but a “fat tail” of companies has low
profitability and heavy debt. Such defaults would spread losses in
“credit default swaps”, which insure such debt. The losses could be
$250bn. Some insurers might go bankrupt.

Step nine would be a meltdown in the “shadow financial system”.
Dealing with the distress of hedge funds, special investment vehicles
and so forth will be made more difficult by the fact that they have no
direct access to lending from central banks.

Step 10 would be a further collapse in stock prices. Failures of hedge
funds, margin calls and shorting could lead to cascading falls in
prices.

Step 11 would be a drying-up of liquidity in a range of financial
markets, including interbank and money markets. Behind this would be a
jump in concerns about solvency.

Step 12 would be “a vicious circle of losses, capital reduction,
credit contraction, forced liquidation and fire sales of assets at
below fundamental prices”.

These, then, are 12 steps to meltdown. In all, argues Prof Roubini:
“Total losses in the financial system will add up to more than
$1,000bn and the economic recession will become deeper more protracted
and severe.” This, he suggests, is the “nightmare scenario” keeping
Ben Bernanke and colleagues at the US Federal Reserve awake. It
explains why, having failed to appreciate the dangers for so long, the
Fed has lowered rates by 200 basis points this year. This is insurance
against a financial meltdown.

Is this kind of scenario at least plausible? It is. Furthermore, we
can be confident that it would, if it came to pass, end all stories
about “decoupling”. If it lasts six quarters, as Prof Roubini warns,
offsetting policy action in the rest of the world would be too little,
too late.

Can the Fed head this danger off? In a subsequent piece, Prof Roubini
gives eight reasons why it cannot***. (He really loves lists!) These
are, in brief: US monetary easing is constrained by risks to the
dollar and inflation; aggressive easing deals only with illiquidity,
not insolvency; the monoline insurers will lose their credit ratings,
with dire consequences; overall losses will be too large for sovereign
wealth funds to deal with; public intervention is too small to
stabilise housing losses; the Fed cannot address the problems of the
shadow financial system; regulators cannot find a good middle way
between transparency over losses and regulatory forbearance, both of
which are needed; and, finally, the transactions-oriented financial
system is itself in deep crisis.

The risks are indeed high and the ability of the authorities to deal
with them more limited than most people hope. This is not to suggest
that there are no ways out. Unfortunately, they are poisonous ones. In
the last resort, governments resolve financial crises. This is an iron
law. Rescues can occur via overt government assumption of bad debt,
inflation, or both. Japan chose the first, much to the distaste of its
ministry of finance. But Japan is a creditor country whose savers have
complete confidence in the solvency of their government. The US,
however, is a debtor. It must keep the trust of foreigners. Should it
fail to do so, the inflationary solution becomes probable. This is
quite enough to explain why gold costs $920 an ounce.

The connection between the bursting of the housing bubble and the
fragility of the financial system has created huge dangers, for the US
and the rest of the world. The US public sector is now coming to the
rescue, led by the Fed. In the end, they will succeed. But the journey
is likely to be wretchedly uncomfortable.

email : martin [dot] wolf [at] ft [dot] com

FORECLOSURE PORN
http://www.boingboing.net/2008/02/26/subprime-primer-stic.html
http://docs.google.com/TeamPresent?docid=ddp4zq7n_0cdjsr4fn&skipauth=true&pli=1

THE BANKRUPTCY BUBBLE
http://www.vanityfair.com/politics/features/2007/12/bush200712
The next president will have to deal with yet another crippling legacy
of George W. Bush: the economy. A Nobel laureate, Joseph E. Stiglitz,
sees a generation-long struggle to recoup.

The Economic Consequences of Mr. Bush
BY Joseph E. Stiglitz  /  December 2007
http://www2.gsb.columbia.edu/faculty/jstiglitz/index.cfm

The American economy can take a lot of abuse, but no economy is
invincible.

When we look back someday at the catastrophe that was the Bush
administration, we will think of many things: the tragedy of the Iraq
war, the shame of Guantánamo and Abu Ghraib, the erosion of civil
liberties. The damage done to the American economy does not make front-
page headlines every day, but the repercussions will be felt beyond
the lifetime of anyone reading this page.

I can hear an irritated counterthrust already. The president has not
driven the United States into a recession during his almost seven
years in office. Unemployment stands at a respectable 4.6 percent.
Well, fine. But the other side of the ledger groans with distress: a
tax code that has become hideously biased in favor of the rich; a
national debt that will probably have grown 70 percent by the time
this president leaves Washington; a swelling cascade of mortgage
defaults; a record near-$850 billion trade deficit; oil prices that
are higher than they have ever been; and a dollar so weak that for an
American to buy a cup of coffee in London or Paris—or even the Yukon—
becomes a venture in high finance.

And it gets worse. After almost seven years of this president, the
United States is less prepared than ever to face the future. We have
not been educating enough engineers and scientists, people with the
skills we will need to compete with China and India. We have not been
investing in the kinds of basic research that made us the
technological powerhouse of the late 20th century. And although the
president now understands—or so he says—that we must begin to wean
ourselves from oil and coal, we have on his watch become more deeply
dependent on both.

Up to now, the conventional wisdom has been that Herbert Hoover, whose
policies aggravated the Great Depression, is the odds-on claimant for
the mantle “worst president” when it comes to stewardship of the
American economy. Once Franklin Roosevelt assumed office and reversed
Hoover’s policies, the country began to recover. The economic effects
of Bush’s presidency are more insidious than those of Hoover, harder
to reverse, and likely to be longer-lasting. There is no threat of
America’s being displaced from its position as the world’s richest
economy. But our grandchildren will still be living with, and
struggling with, the economic consequences of Mr. Bush.

Remember the Surplus?

The world was a very different place, economically speaking, when
George W. Bush took office, in January 2001. During the Roaring 90s,
many had believed that the Internet would transform everything.
Productivity gains, which had averaged about 1.5 percent a year from
the early 1970s through the early 90s, now approached 3 percent.
During Bill Clinton’s second term, gains in manufacturing productivity
sometimes even surpassed 6 percent. The Federal Reserve chairman, Alan
Greenspan, spoke of a New Economy marked by continued productivity
gains as the Internet buried the old ways of doing business. Others
went so far as to predict an end to the business cycle. Greenspan
worried aloud about how he’d ever be able to manage monetary policy
once the nation’s debt was fully paid off.

This tremendous confidence took the Dow Jones index higher and higher.
The rich did well, but so did the not-so-rich and even the downright
poor. The Clinton years were not an economic Nirvana; as chairman of
the president’s Council of Economic Advisers during part of this time,
I’m all too aware of mistakes and lost opportunities. The global-trade
agreements we pushed through were often unfair to developing
countries. We should have invested more in infrastructure, tightened
regulation of the securities markets, and taken additional steps to
promote energy conservation. We fell short because of politics and
lack of money—and also, frankly, because special interests sometimes
shaped the agenda more than they should have. But these boom years
were the first time since Jimmy Carter that the deficit was under
control. And they were the first time since the 1970s that incomes at
the bottom grew faster than those at the top—a benchmark worth
celebrating.

By the time George W. Bush was sworn in, parts of this bright picture
had begun to dim. The tech boom was over. The nasdaq fell 15 percent
in the single month of April 2000, and no one knew for sure what
effect the collapse of the Internet bubble would have on the real
economy. It was a moment ripe for Keynesian economics, a time to prime
the pump by spending more money on education, technology, and
infrastructure—all of which America desperately needed, and still
does, but which the Clinton administration had postponed in its
relentless drive to eliminate the deficit. Bill Clinton had left
President Bush in an ideal position to pursue such policies. Remember
the presidential debates in 2000 between Al Gore and George Bush, and
how the two men argued over how to spend America’s anticipated $2.2
trillion budget surplus? The country could well have afforded to ramp
up domestic investment in key areas. In fact, doing so would have
staved off recession in the short run while spurring growth in the
long run.

But the Bush administration had its own ideas. The first major
economic initiative pursued by the president was a massive tax cut for
the rich, enacted in June of 2001. Those with incomes over a million
got a tax cut of $18,000—more than 30 times larger than the cut
received by the average American. The inequities were compounded by a
second tax cut, in 2003, this one skewed even more heavily toward the
rich. Together these tax cuts, when fully implemented and if made
permanent, mean that in 2012 the average reduction for an American in
the bottom 20 percent will be a scant $45, while those with incomes of
more than $1 million will see their tax bills reduced by an average of
$162,000.

The administration crows that the economy grew—by some 16 percent—
during its first six years, but the growth helped mainly people who
had no need of any help, and failed to help those who need plenty. A
rising tide lifted all yachts. Inequality is now widening in America,
and at a rate not seen in three-quarters of a century. A young male in
his 30s today has an income, adjusted for inflation, that is 12
percent less than what his father was making 30 years ago. Some 5.3
million more Americans are living in poverty now than were living in
poverty when Bush became president. America’s class structure may not
have arrived there yet, but it’s heading in the direction of Brazil’s
and Mexico’s.

The Bankruptcy Boom

In breathtaking disregard for the most basic rules of fiscal
propriety, the administration continued to cut taxes even as it
undertook expensive new spending programs and embarked on a
financially ruinous “war of choice” in Iraq. A budget surplus of 2.4
percent of gross domestic product (G.D.P.), which greeted Bush as he
took office, turned into a deficit of 3.6 percent in the space of four
years. The United States had not experienced a turnaround of this
magnitude since the global crisis of World War II.

Agricultural subsidies were doubled between 2002 and 2005. Tax
expenditures—the vast system of subsidies and preferences hidden in
the tax code—increased more than a quarter. Tax breaks for the
president’s friends in the oil-and-gas industry increased by billions
and billions of dollars. Yes, in the five years after 9/11, defense
expenditures did increase (by some 70 percent), though much of the
growth wasn’t helping to fight the War on Terror at all, but was being
lost or outsourced in failed missions in Iraq. Meanwhile, other funds
continued to be spent on the usual high-tech gimcrackery—weapons that
don’t work, for enemies we don’t have. In a nutshell, money was being
spent everyplace except where it was needed. During these past seven
years the percentage of G.D.P. spent on research and development
outside defense and health has fallen. Little has been done about our
decaying infrastructure—be it levees in New Orleans or bridges in
Minneapolis. Coping with most of the damage will fall to the next
occupant of the White House.

Although it railed against entitlement programs for the needy, the
administration enacted the largest increase in entitlements in four
decades—the poorly designed Medicare prescription-drug benefit,
intended as both an election-season bribe and a sop to the
pharmaceutical industry. As internal documents later revealed, the
true cost of the measure was hidden from Congress. Meanwhile, the
pharmaceutical companies received special favors. To access the new
benefits, elderly patients couldn’t opt to buy cheaper medications
from Canada or other countries. The law also prohibited the U.S.
government, the largest single buyer of prescription drugs, from
negotiating with drug manufacturers to keep costs down. As a result,
American consumers pay far more for medications than people elsewhere
in the developed world.

You’ll still hear some—and, loudly, the president himself—argue that
the administration’s tax cuts were meant to stimulate the economy, but
this was never true. The bang for the buck—the amount of stimulus per
dollar of deficit—was astonishingly low. Therefore, the job of
economic stimulation fell to the Federal Reserve Board, which stepped
on the accelerator in a historically unprecedented way, driving
interest rates down to 1 percent. In real terms, taking inflation into
account, interest rates actually dropped to negative 2 percent. The
predictable result was a consumer spending spree. Looked at another
way, Bush’s own fiscal irresponsibility fostered irresponsibility in
everyone else. Credit was shoveled out the door, and subprime
mortgages were made available to anyone this side of life support.
Credit-card debt mounted to a whopping $900 billion by the summer of
2007. “Qualified at birth” became the drunken slogan of the Bush era.
American households took advantage of the low interest rates, signed
up for new mortgages with “teaser” initial rates, and went to town on
the proceeds.

All of this spending made the economy look better for a while; the
president could (and did) boast about the economic statistics. But the
consequences for many families would become apparent within a few
years, when interest rates rose and mortgages proved impossible to
repay. The president undoubtedly hoped the reckoning would come
sometime after 2008. It arrived 18 months early. As many as 1.7
million Americans are expected to lose their homes in the months
ahead. For many, this will mean the beginning of a downward spiral
into poverty.

Between March 2006 and March 2007 personal-bankruptcy rates soared
more than 60 percent. As families went into bankruptcy, more and more
of them came to understand who had won and who had lost as a result of
the president’s 2005 bankruptcy bill, which made it harder for
individuals to discharge their debts in a reasonable way. The lenders
that had pressed for “reform” had been the clear winners, gaining
added leverage and protections for themselves; people facing financial
distress got the shaft.

And Then There’s Iraq

The war in Iraq (along with, to a lesser extent, the war in
Afghanistan) has cost the country dearly in blood and treasure. The
loss in lives can never be quantified. As for the treasure, it’s worth
calling to mind that the administration, in the run-up to the invasion
of Iraq, was reluctant to venture an estimate of what the war would
cost (and publicly humiliated a White House aide who suggested that it
might run as much as $200 billion). When pressed to give a number, the
administration suggested $50 billion—what the United States is
actually spending every few months. Today, government figures
officially acknowledge that more than half a trillion dollars total
has been spent by the U.S. “in theater.” But in fact the overall cost
of the conflict could be quadruple that amount—as a study I did with
Linda Bilmes of Harvard has pointed out—even as the Congressional
Budget Office now concedes that total expenditures are likely to be
more than double the spending on operations. The official numbers do
not include, for instance, other relevant expenditures hidden in the
defense budget, such as the soaring costs of recruitment, with re-
enlistment bonuses of as much as $100,000. They do not include the
lifetime of disability and health-care benefits that will be required
by tens of thousands of wounded veterans, as many as 20 percent of
whom have suffered devastating brain and spinal injuries.
Astonishingly, they do not include much of the cost of the equipment
that has been used in the war, and that will have to be replaced. If
you also take into account the costs to the economy from higher oil
prices and the knock-on effects of the war—for instance, the
depressing domino effect that war-fueled uncertainty has on
investment, and the difficulties U.S. firms face overseas because
America is the most disliked country in the world—the total costs of
the Iraq war mount, even by a conservative estimate, to at least $2
trillion. To which one needs to add these words: so far.

It is natural to wonder, What would this money have bought if we had
spent it on other things? U.S. aid to all of Africa has been hovering
around $5 billion a year, the equivalent of less than two weeks of
direct Iraq-war expenditures. The president made a big deal out of the
financial problems facing Social Security, but the system could have
been repaired for a century with what we have bled into the sands of
Iraq. Had even a fraction of that $2 trillion been spent on
investments in education and technology, or improving our
infrastructure, the country would be in a far better position
economically to meet the challenges it faces in the future, including
threats from abroad. For a sliver of that $2 trillion we could have
provided guaranteed access to higher education for all qualified
Americans.

The soaring price of oil is clearly related to the Iraq war. The issue
is not whether to blame the war for this but simply how much to blame
it. It seems unbelievable now to recall that Bush-administration
officials before the invasion suggested not only that Iraq’s oil
revenues would pay for the war in its entirety—hadn’t we actually
turned a tidy profit from the 1991 Gulf War?—but also that war was the
best way to ensure low oil prices. In retrospect, the only big winners
from the war have been the oil companies, the defense contractors, and
al-Qaeda. Before the war, the oil markets anticipated that the then
price range of $20 to $25 a barrel would continue for the next three
years or so. Market players expected to see more demand from China and
India, sure, but they also anticipated that this greater demand would
be met mostly by increased production in the Middle East. The war
upset that calculation, not so much by curtailing oil production in
Iraq, which it did, but rather by heightening the sense of insecurity
everywhere in the region, suppressing future investment.

The continuing reliance on oil, regardless of price, points to one
more administration legacy: the failure to diversify America’s energy
resources. Leave aside the environmental reasons for weaning the world
from hydrocarbons—the president has never convincingly embraced them,
anyway. The economic and national-security arguments ought to have
been powerful enough. Instead, the administration has pursued a policy
of “drain America first”—that is, take as much oil out of America as
possible, and as quickly as possible, with as little regard for the
environment as one can get away with, leaving the country even more
dependent on foreign oil in the future, and hope against hope that
nuclear fusion or some other miracle will come to the rescue. So many
gifts to the oil industry were included in the president’s 2003 energy
bill that John McCain referred to it as the “No Lobbyist Left Behind”
bill.

Contempt for the World

America’s budget and trade deficits have grown to record highs under
President Bush. To be sure, deficits don’t have to be crippling in and
of themselves. If a business borrows to buy a machine, it’s a good
thing, not a bad thing. During the past six years, America—its
government, its families, the country as a whole—has been borrowing to
sustain its consumption. Meanwhile, investment in fixed assets—the
plants and equipment that help increase our wealth—has been declining.

What’s the impact of all this down the road? The growth rate in
America’s standard of living will almost certainly slow, and there
could even be a decline. The American economy can take a lot of abuse,
but no economy is invincible, and our vulnerabilities are plain for
all to see. As confidence in the American economy has plummeted, so
has the value of the dollar—by 40 percent against the euro since 2001.

The disarray in our economic policies at home has parallels in our
economic policies abroad. President Bush blamed the Chinese for our
huge trade deficit, but an increase in the value of the yuan, which he
has pushed, would simply make us buy more textiles and apparel from
Bangladesh and Cambodia instead of China; our deficit would remain
unchanged. The president claimed to believe in free trade but
instituted measures aimed at protecting the American steel industry.
The United States pushed hard for a series of bilateral trade
agreements and bullied smaller countries into accepting all sorts of
bitter conditions, such as extending patent protection on drugs that
were desperately needed to fight aids. We pressed for open markets
around the world but prevented China from buying Unocal, a small
American oil company, most of whose assets lie outside the United
States.

Not surprisingly, protests over U.S. trade practices erupted in places
such as Thailand and Morocco. But America has refused to compromise—
refused, for instance, to take any decisive action to do away with our
huge agricultural subsidies, which distort international markets and
hurt poor farmers in developing countries. This intransigence led to
the collapse of talks designed to open up international markets. As in
so many other areas, President Bush worked to undermine multilateralism
—the notion that countries around the world need to cooperate—and to
replace it with an America-dominated system. In the end, he failed to
impose American dominance—but did succeed in weakening cooperation.

The administration’s basic contempt for global institutions was
underscored in 2005 when it named Paul Wolfowitz, the former deputy
secretary of defense and a chief architect of the Iraq war, as
president of the World Bank. Widely distrusted from the outset, and
soon caught up in personal controversy, Wolfowitz became an
international embarrassment and was forced to resign his position
after less than two years on the job.

Globalization means that America’s economy and the rest of the world
have become increasingly interwoven. Consider those bad American
mortgages. As families default, the owners of the mortgages find
themselves holding worthless pieces of paper. The originators of these
problem mortgages had already sold them to others, who packaged them,
in a non-transparent way, with other assets, and passed them on once
again to unidentified others. When the problems became apparent,
global financial markets faced real tremors: it was discovered that
billions in bad mortgages were hidden in portfolios in Europe, China,
and Australia, and even in star American investment banks such as
Goldman Sachs and Bear Stearns. Indonesia and other developing
countries—innocent bystanders, really—suffered as global risk premiums
soared, and investors pulled money out of these emerging markets,
looking for safer havens. It will take years to sort out this mess.

Meanwhile, we have become dependent on other nations for the financing
of our own debt. Today, China alone holds more than $1 trillion in
public and private American I.O.U.’s. Cumulative borrowing from abroad
during the six years of the Bush administration amounts to some $5
trillion. Most likely these creditors will not call in their loans—if
they ever did, there would be a global financial crisis. But there is
something bizarre and troubling about the richest country in the world
not being able to live even remotely within its means. Just as
Guantánamo and Abu Ghraib have eroded America’s moral authority, so
the Bush administration’s fiscal housekeeping has eroded our economic
authority.

The Way Forward

Whoever moves into the White House in January 2009 will face an
unenviable set of economic circumstances. Extricating the country from
Iraq will be the bloodier task, but putting America’s economic house
in order will be wrenching and take years.

The most immediate challenge will be simply to get the economy’s
metabolism back into the normal range. That will mean moving from a
savings rate of zero (or less) to a more typical savings rate of, say,
4 percent. While such an increase would be good for the long-term
health of America’s economy, the short-term consequences would be
painful. Money saved is money not spent. If people don’t spend money,
the economic engine stalls. If households curtail their spending
quickly—as they may be forced to do as a result of the meltdown in the
mortgage market—this could mean a recession; if done in a more
measured way, it would still mean a protracted slowdown. The problems
of foreclosure and bankruptcy posed by excessive household debt are
likely to get worse before they get better. And the federal government
is in a bind: any quick restoration of fiscal sanity will only
aggravate both problems.

And in any case there’s more to be done. What is required is in some
ways simple to describe: it amounts to ceasing our current behavior
and doing exactly the opposite. It means not spending money that we
don’t have, increasing taxes on the rich, reducing corporate welfare,
strengthening the safety net for the less well off, and making greater
investment in education, technology, and infrastructure.

When it comes to taxes, we should be trying to shift the burden away
from things we view as good, such as labor and savings, to things we
view as bad, such as pollution. With respect to the safety net, we
need to remember that the more the government does to help workers
improve their skills and get affordable health care the more we free
up American businesses to compete in the global economy. Finally,
we’ll be a lot better off if we work with other countries to create
fair and efficient global trade and financial systems. We’ll have a
better chance of getting others to open up their markets if we
ourselves act less hypocritically—that is, if we open our own markets
to their goods and stop subsidizing American agriculture.

Some portion of the damage done by the Bush administration could be
rectified quickly. A large portion will take decades to fix—and that’s
assuming the political will to do so exists both in the White House
and in Congress. Think of the interest we are paying, year after year,
on the almost $4 trillion of increased debt burden—even at 5 percent,
that’s an annual payment of $200 billion, two Iraq wars a year
forever. Think of the taxes that future governments will have to levy
to repay even a fraction of the debt we have accumulated. And think of
the widening divide between rich and poor in America, a phenomenon
that goes beyond economics and speaks to the very future of the
American Dream.

In short, there’s a momentum here that will require a generation to
reverse. Decades hence we should take stock, and revisit the
conventional wisdom. Will Herbert Hoover still deserve his dubious
mantle? I’m guessing that George W. Bush will have earned one more
grim superlative.

A ‘MINSKY MELTDOWN’?
http://en.wikipedia.org/wiki/Hyman_Minsky
http://cepa.newschool.edu/het/profiles/minsky.htm
http://www.metafilter.com/64260/Minsky-Meltdown-ahead

http://www.rgemonitor.com/blog/roubini/208166
http://forestpolicy.typepad.com/economics/2007/07/minsky-moment-h.html
http://online.wsj.com/article/SB118736585456901047.html

ECONOMIC ARSON
http://www.newyorker.com/talk/comment/2008/02/04/080204taco_talk_cassidy
The Minsky Moment
BY John Cassidy  /  February 4, 2008

Twenty-five years ago, when most economists were extolling the virtues
of financial deregulation and innovation, a maverick named Hyman P.
Minsky maintained a more negative view of Wall Street; in fact, he
noted that bankers, traders, and other financiers periodically played
the role of arsonists, setting the entire economy ablaze. Wall Street
encouraged businesses and individuals to take on too much risk, he
believed, generating ruinous boom-and-bust cycles. The only way to
break this pattern was for the government to step in and regulate the
moneymen.

Many of Minsky’s colleagues regarded his “financial-instability
hypothesis,” which he first developed in the nineteen-sixties, as
radical, if not crackpot. Today, with the subprime crisis seemingly on
the verge of metamorphosing into a recession, references to it have
become commonplace on financial Web sites and in the reports of Wall
Street analysts. Minsky’s hypothesis is well worth revisiting. In
trying to revive the economy, President Bush and the House have
already agreed on the outlines of a “stimulus package,” but the first
stage in curing any malady is making a correct diagnosis.

Minsky, who died in 1996, at the age of seventy-seven, earned a Ph.D.
from Harvard and taught at Brown, Berkeley, and Washington University.
He didn’t have anything against financial institutions—for many years,
he served as a director of the Mark Twain Bank, in St. Louis—but he
knew more about how they worked than most deskbound economists. There
are basically five stages in Minsky’s model of the credit cycle:
displacement, boom, euphoria, profit taking, and panic. A displacement
occurs when investors get excited about something—an invention, such
as the Internet, or a war, or an abrupt change of economic policy. The
current cycle began in 2003, with the Fed chief Alan Greenspan’s
decision to reduce short-term interest rates to one per cent, and an
unexpected influx of foreign money, particularly Chinese money, into
U.S. Treasury bonds. With the cost of borrowing—mortgage rates, in
particular—at historic lows, a speculative real-estate boom quickly
developed that was much bigger, in terms of over-all valuation, than
the previous bubble in technology stocks.

As a boom leads to euphoria, Minsky said, banks and other commercial
lenders extend credit to ever more dubious borrowers, often creating
new financial instruments to do the job. During the nineteen-eighties,
junk bonds played that role. More recently, it was the securitization
of mortgages, which enabled banks to provide home loans without
worrying if they would ever be repaid. (Investors who bought the
newfangled securities would be left to deal with any defaults.) Then,
at the top of the market (in this case, mid-2006), some smart traders
start to cash in their profits.

The onset of panic is usually heralded by a dramatic effect: in July,
two Bear Stearns hedge funds that had invested heavily in mortgage
securities collapsed. Six months and four interest-rate cuts later,
Ben Bernanke and his colleagues at the Fed are struggling to contain
the bust. Despite last week’s rebound, the outlook remains grim.
According to Dean Baker, the co-director of the Center for Economic
and Policy Research, average house prices are falling nationwide at an
annual rate of more than ten per cent, something not seen since before
the Second World War. This means that American households are getting
poorer at a rate of more than two trillion dollars a year.

It’s hard to say exactly how falling house prices will affect the
economy, but recent computer simulations carried out by Frederic
Mishkin, a governor at the Fed, suggest that, for every dollar the
typical American family’s housing wealth drops in a year, that family
may cut its spending by up to seven cents. Nationwide, that adds up to
roughly a hundred and fifty-five billion dollars, which is bigger than
President Bush’s stimulus package. And it doesn’t take into account
plunging stock prices, collapsing confidence, and the belated
imposition of tighter lending practices—all of which will further
restrict economic activity.

In an election year, politicians can’t be expected to acknowledge
their powerlessness. Nonetheless, it was disheartening to see the
Republicans exploiting the current crisis to try to make the
President’s tax cuts permanent, and the Democrats attempting to pin
the economic downturn on the White House. For once, Bush is not to
blame. His tax cuts were irresponsible and callously regressive, but
they didn’t play a significant role in the housing bubble.

If anybody is at fault it is Greenspan, who kept interest rates too
low for too long and ignored warnings, some from his own colleagues,
about what was happening in the mortgage market. But he wasn’t the
only one. Between 2003 and 2007, most Americans didn’t want to hear
about the downside of funds that invest in mortgage-backed securities,
or of mortgages that allow lenders to make monthly payments so low
that their loan balances sometimes increase. They were busy wondering
how much their neighbors had made selling their apartment, scouting
real-estate Web sites and going to open houses, and calling up
Washington Mutual or Countrywide to see if they could get another home-
equity loan. That’s the nature of speculative manias: eventually, they
draw in almost all of us.

You might think that the best solution is to prevent manias from
developing at all, but that requires vigilance. Since the nineteen-
eighties, Congress and the executive branch have been conspiring to
weaken federal supervision of Wall Street. Perhaps the most fateful
step came when, during the Clinton Administration, Greenspan and
Robert Rubin, then the Treasury Secretary, championed the abolition of
the Glass-Steagall Act of 1933, which was meant to prevent a
recurrence of the rampant speculation that preceded the Depression.

The greatest need is for intellectual reappraisal, and a good place to
begin is with a statement from a paper co-authored by Minsky that “apt
intervention and institutional structures are necessary for market
economies to be successful.” Rather than waging old debates about tax
cuts versus spending increases, policymakers ought to be discussing
how to reform the financial system so that it serves the rest of the
economy, instead of feeding off it and destabilizing it. Among the
problems at hand: how to restructure Wall Street remuneration packages
that encourage excessive risk-taking; restrict irresponsible lending
without shutting out creditworthy borrowers; help victims of predatory
practices without bailing out irresponsible lenders; and hold ratings
agencies accountable for their assessments. These are complex issues,
with few easy solutions, but that’s what makes them interesting. As
Minsky believed, “Economies evolve, and so, too, must economic
policy.” ♦

FORTUNE TELLING
“Stephen E. Flynn is Jeane J. Kirkpatrick Senior Fellow for National
Security Studies at the Council on Foreign Relations and the author of
The Edge of Disaster: Rebuilding a Resilient Nation (Random House,
2007), from which this essay is drawn.”

AMERICA THE RESILIENT  [IN BED]
http://www.foreignaffairs.org/20080301faessay87201/stephen-e-flynn/america-the-resilient.html
Defying Terrorism and Mitigating Natural Disasters
BY Stephen E. Flynn  /  Council on Foreign Relations  /  March/April
2008

When it comes to managing the hazards of the twenty-first century, it
is reckless to relegate the American public to the sidelines. During
the Cold War, the threat of nuclear weapons placed the fate of
millions in the hands of a few. But responding to today’s challenges,
the threats of terrorism and natural disasters, requires the broad
engagement of civil society. The terrorists’ chosen battlegrounds are
likely to be occupied by civilians, not soldiers. And more than the
loss of innocent lives is at stake: a climate of fear and a sense of
powerlessness in the face of adversity are undermining faith in
American ideals and fueling political demagoguery. Sustaining the
United States’ global leadership and economic competitiveness
ultimately depends on bolstering the resilience of its society.
Periodically, things will go badly wrong. The United States must be
prepared to minimize the consequences of those eventualities and
bounce back quickly.

Resilience has historically been one of the United States’ great
national strengths. It was the quality that helped tame a raw
continent and then allowed the country to cope with the extraordinary
challenges that occasionally placed the American experiment in peril.
From the early settlements in Virginia and Massachusetts to the
westward expansion, Americans willingly ventured into the wild to
build better lives. During the epic struggles of the American
Revolution, the American Civil War, and the two world wars; occasional
economic downturns and the Great Depression; and the periodic scourges
of earthquakes, epidemics, floods, and hurricanes, Americans have
drawn strength from adversity. Each generation bequeathed to the next
a sense of confidence and optimism about the future.

But this reservoir of self-sufficiency is being depleted. The United
States is becoming a brittle nation. An increasingly urbanized and
suburbanized population has embraced just-in-time lifestyles tethered
to ATM machines and 24-hour stores that provide instant access to
cash, food, and gas. When the power goes out and these modern
conveniences fail, Americans are incapacitated. Meanwhile, two decades
of taxpayer rebellion have stripped away the means necessary for
government workers to provide help during emergencies. Most city and
state public health and emergency-management departments are not
funded adequately enough for them to carry out even their routine
work. A flu pandemic or other major disaster would completely
overwhelm them. A report on disaster preparedness released in June
2006 by the U.S. Department of Homeland Security found that only 25
percent of state emergency operations plans and 10 percent of
municipal plans were sufficient to cope with a natural disaster or a
terrorist attack; the majority of the plans were deemed “not fully
adequate, feasible, or acceptable to manage catastrophic events.” And
even as community and individual preparedness is in decline, nine out
of ten Americans now live in locations that place them at a moderate
to high risk of experiencing damaging high wind, earthquakes,
flooding, hurricanes, volcanic eruptions, or wildfires. Climate change
will increase the frequency of such calamities.

The United States’ aging infrastructure compounds the risk of
destruction and disruption. One of the rationales for building the
interstate highway system was to support the evacuation of major
cities if the Cold War turned hot; in 2006, the year the system turned
50, Americans spent a total of 3.5 billion hours stuck in traffic.
Public works departments construct “temporary” patches for dams,
leaving Americans who live downstream one major storm away from having
water pouring into their living rooms. Bridges are outfitted with the
civil engineering equivalent of diapers. Like the occupants of a grand
old mansion who elect not to do any upkeep, Americans have been
neglecting the infrastructure that supports a modern society. In 2005,
after a review of hundreds of studies and reports and a survey of more
than 2,000 engineers, the American Society of Civil Engineers issued a
scathing report card on 15 categories of infrastructure: the national
power grid, dams, canal locks, and seven other infrastructure sectors
received Ds; the best grade, a C+, went to bridges, and even in that
case, 160,570 bridges, out of a total of 590,750, were rated
structurally deficient or functionally obsolete.

These downward trends in preparedness and infrastructural integrity
could be reversed by stepped-up investment and more effective
leadership. Unfortunately, Washington has been leading the nation in
the opposite direction. Since September 11, 2001, the White House has
failed to draw on the legacy of American grit, volunteerism, and
ingenuity in the face of adversity. Instead, it has sent a mixed
message, touting terrorism as a clear and present danger while telling
Americans to just go about their daily lives. Unlike during World War
II, when the entire U.S. population was mobilized, much of official
Washington today treats citizens as helpless targets or potential
victims.

This discounting of the public can be traced to the culture of secrecy
and paternalism that now pervades the national defense and federal law
enforcement communities. After decades of combating Soviet espionage
during the Cold War, the federal security establishment instinctively
resists disclosing information for fear that it might end up in the
wrong hands. Straight talk about the country’s vulnerabilities and how
to cope in emergencies is presumed to be too frightening for public
consumption.

This is madness. The overwhelming majority of Americans live in places
where the occurrence of a natural disaster is a matter of not if, but
when. And terrorist groups’ targets of choice are noncombatants and
infrastructure. These are hazards that can be managed only by an
informed, inspired, and mobilized public. Both the first preventers
and the first responders are likely to be civilians.

LESSON UNLEARNED
In retrospect, it is remarkable that the events of September 11 have
been used to elevate the role of professional warriors, spies, and
cops at the expense of enlisting citizens to assist in securing the
nation. Unfortunately, the prevailing interpretation of that day
focuses almost entirely on the three airliners that struck the World
Trade Center towers and the Pentagon. President George W. Bush has
concluded from those attacks that the U.S. government needs to do
whatever it takes to hunt down its enemies before they kill innocent
civilians again.

But it is the story of United Airlines flight 93, the thwarted fourth
plane, which crashed in a Pennsylvania field, that ought to be the
dominant 9/11 narrative. That plane’s passengers foiled al Qaeda
without any help from — and in spite of the inaction of — the U.S.
government. There were no federal air marshals aboard the aircraft.
The North American Aerospace Defense Command, or NORAD, could not
intercept it; it did not even know that the plane had been hijacked.
Yet United 93 was stopped 140 miles from its likely destination — the
U.S. Capitol or the White House — because of the actions of the
passengers who stormed the cockpit. Of all the passengers on the four
9/11 planes, only those aboard United 93 knew their hijackers’
intention. Theirs was the last plane off the ground. Once the
terrorists took control of it, they did not prevent passengers from
making urgent calls to family and friends, who told them what their
counterparts on the three earlier flights discovered only during their
final seconds. Americans should celebrate — and ponder — the reality
that the legislative and executive centers of the U.S. federal
government, whose constitutional duty is to “provide for the common
defense,” were themselves defended that day by one thing alone: an
alert and heroic citizenry.

The story of United 93 also raises a serious question that the 9/11
Commission failed to examine: might the passengers on the other three
planes have reacted, too, if they had known the hijackers’ plans? The
9/11 Commission documents that in the years leading up to the attacks
on New York and Washington, a number of people inside the U.S.
government had collected intelligence suggesting that terrorists were
interested in using passenger airliners as weapons. But because that
information was viewed as sensitive, the government never shared it
with the public. What if it had been widely publicized? How would the
passengers aboard the first three jets have behaved?

The next president needs to embrace the United 93 story — and
consider these questions — in order to reawaken the spirit of
community and volunteerism witnessed throughout the nation in the
months immediately following 9/11. If U.S. history is a guide, people
will respond to the call to service. They only need to be asked.

THE BEST DEFENSE
The rallying point should be a call for greater resilience. Building
the resilience of American society would increase the nation’s
security by depriving al Qaeda and other terrorists of the fear
dividend they hope to reap by threatening to carrying out catastrophic
attacks. In military terms, the United States is too large, and al
Qaeda’s capacity to attack the U.S. homeland too limited, for
terrorists like them to inflict nationwide destruction. All they can
hope for is to spawn enough fear to spur Washington into overreacting
in costly and self-destructive ways.

Fear arises both from being aware of a threat and from feeling
powerless to deal with it. And although it is impossible to eliminate
every threat that causes such fear, Americans do have the power to
manage their fear and their reactions to it. For more then six years,
however, Washington has been sounding the alarm about apocalyptic
terrorist groups while providing the American people with no
meaningful guidance on how to deal with the threats they pose or the
consequences of a successful attack. This toxic mix of fear and
helplessness jeopardizes U.S. security by increasing the risk that the
U.S. government will overreact to another terrorist attack.

What Washington should do instead is arm Americans with greater
confidence in their ability to prepare for and recover from terrorist
strikes and disasters of all types. Confidence in their resilience
would cap their fear and in turn undermine much of the incentives
terrorists have for incurring the costs and risks of targeting the
U.S. homeland.

The United States needs the kind of resilience that the British
displayed during World War II when V-1 bombs were raining down on
London. Volunteers put the fires out, rescued the wounded from the
rubble, and then went on with their lives until the air-raid warnings
were sounded again. More than a half century later, the United Kingdom
showed its resilience once more after suicide bombers attacked the
London Underground with the intent of crippling the city’s public
transportation system. That objective was foiled when resolute
commuters showed up to board the trains the next morning.

Such resilience results from a sustained commitment to four factors.
First, there is robustness, the ability to keep operating or to stay
standing in the face of disaster. In some cases, it translates into
designing structures or systems (such as buildings and bridges) strong
enough to take a foreseeable punch. In others (such as developing
transportation, energy, and communications networks), robustness
requires devising substitutable or redundant systems that can be
brought to bear should something important break or stop working.
Robustness also entails investing in and maintaining elements of
critical infrastructure, such as dams and levees, so that they can
withstand low-probability but high-consequence events.

Second is resourcefulness, which involves skillfully managing a
disaster once it unfolds. It includes identifying options,
prioritizing what should be done both to control damage and to begin
mitigating it, and communicating decisions to the people who will
implement them. Resourcefulness depends primarily on people, not
technology. Ensuring that U.S. society is resourceful means providing
adequate resources to the National Guard, the American Red Cross,
public health officials, firefighters, emergency-room staffs, and
other emergency planners and responders.

The third element of resilience is rapid recovery, which is the
capacity to get things back to normal as quickly as possible after a
disaster. Carefully drafted contingency plans, competent emergency
operations, and the means to get the right people and resources to the
right places are crucial. Some small communities, such as Eden
Prairie, Minnesota, are organizing themselves so that everyone can
pitch in right away in the case of an emergency. Citizens are being
trained to be auxiliary first responders, and local companies are

committing themselves to providing resources and lending expertise in
order to dramatically reduce the economic aftershocks of any disaster.
Among the larger cities, Seattle has put together a business emergency
network, a communications system linking the city government and
businesses. It is designed to aid the local business community in
predisaster preparation and to help disseminate information quickly
and accurately when disaster strikes.

Finally, resilience means having the means to absorb the new lessons
that can be drawn from a catastrophe. It is foolish for a society to
go right back to business as usual as soon as the dust clears, by,
say, rebuilding homes on floodplains or failing to resolve
interoperable communications issues that confound coordination and
information sharing among first responders. People must be willing to
make pragmatic changes, such as relocating when their homes are
repeatedly destroyed or reaching deeper into their pockets to pay for
the communications and other tools communities need to improve their
robustness, resourcefulness, and recovery capabilities before the next
crisis.

Working to strengthen the four features of resilience is a far more
open and inclusive process than a national effort centered on
security, because it requires drawing on the United States’ greatest
strengths: civil society and the private sector. Furthermore, whereas
boosting the security apparatus is usually very expensive, advancing
resilience almost always provides a positive return on a relatively
smaller investment. As a June 2007 report by the Council on
Competitiveness, a Washington-based group “committed to ensuring the
future prosperity of all Americans,” concluded, “The ability to manage
emerging risks, anticipate the interactions between different types of
risk, and bounce back from disruption will be a competitive
differentiator for companies and countries alike in the 21st century.”

BRAVE NEW AMERICA
Increasing the resilience of the American people will require
presidential leadership. For years, the fear of terrorism has been
stoked and the federal government’s ability to defeat radical
jihadists has been exaggerated. This has created a passive citizenry
that oscillates between fretfulness and cynicism. In his or her
inaugural address, the next president will need to call on Americans
to recapture their spirit of endurance and optimism. During the new
administration’s first hundred days, it must work with Congress to put
in place programs that help Americans build robustness, achieve
resourcefulness, enhance their ability to recover swiftly, and revise
designs and protocols based on lessons learned from crises. Given the
American tradition of self-reliance and volunteerism, the effort will
strike a strong bipartisan chord.

The new secretary of homeland security should be charged with
transforming the department’s law enforcement culture, which so far
has held citizens and the private sector at arms length. He or she
must also reach out to the private sector and task it with taking the
lead in advancing resilience at the company and community levels. CEOs
should not require much prodding. As globalization, interdependence,
and geopolitics become more volatile forces, people and companies will
gravitate to those firms and places that are dependable. Those
enterprises that do poorly at managing crises because they fail to
foresee and prepare for them will lose shareholder value and market
share. Companies adept at managing operational risk can also help
communities rebound when disasters strike. In 2005, for example, Wal-
Mart was able to bring 66 percent of its stores in the Gulf States
back into operation within 48 hours of Hurricane Katrina’s coming
ashore, providing many of the critical supplies that everyday
citizens, small businesses, and government agencies needed to get back
on their feet.

Two tricky but potentially influential allies in the effort could be
the mass media and Hollywood. To a large extent, the stories Americans
see on their small and big screens have been part of the problem. A
more inspirational and less dramatic reality is rarely portrayed. As
the mass evacuation of Manhattan on September 11 made clear, in real
crises Americans largely keep their wits about them and assist one
another. During World War II, Hollywood played a helpful public-
service role by supporting war-bond drives and producing training
films, while providing much-needed entertainment. Media executives
today could do the same by committing themselves to relating stories
and communicating messages that inform and inspire individual and
societal resilience.

In the end, everyday Americans will have to step up to the plate in
their homes, schools, and workplaces. An August 2006 study sponsored
by the Department of Homeland Security found that nine out of ten
Americans believed that being prepared for emergencies was important.
Yet a poll commissioned in the same month by Time magazine found that
only 16 percent of Americans thought they were “very well prepared”
for an emergency.

The good news is that most of the things people can do at the
individual level to prepare themselves, their families, and their
employees are relatively easy. These measures include purchasing a
three-day emergency kit, developing

a family emergency contact plan, and visiting Web sites maintained by
the Red Cross and other organizations that provide instructive what-to-
do lists. Such efforts can provide real peace of mind and save lives
when disaster strikes. They would also represent tangible expressions
of American support for the U.S. soldiers who put their lives on the
line beyond U.S. shores to protect a nation that today remains
recklessly exposed to the consequences of a successful terrorist
attack.

Rebuilding the resilience of U.S. society is an agenda that could
reverse the debilitating politics and mounting cynicism now bedeviling
the U.S. electorate. Whereas increasing security measures is an
inevitable answer to a society’s fears, resilience rests on a
foundation of confidence and optimism. It involves taking stock of
what is truly precious and ensuring its durability in a way that would
allow Americans to remain true to their ideals no matter what tempest
the future may bring.

INFLATION OR REVENUE?

http://media.washingtonpost.com/wp-srv/politics/interactives/factchecker/incometax_20071108.gif
http://epp.eurostat.ec.europa.eu/portal/page?_pageid=1996,39140985&_dad=portal&_schema=PORTAL&product=_STRIND&root=theme0/strind/ecobac/eb011&zone=detail

http://www.mg.co.za/articlepage.aspx?area=/breaking_news/breaking_news__business/&articleid=322726&referrer=RSS
http://blogs.ft.com/wolfforum/2007/08/fear-makes-a-we.html/
http://www.cnbc.com/id/20461003
http://www.prudentbear.com/

PRICE DISTORTIONS
http://www.nytimes.com/2008/03/28/business/28commodities.html
Odd Crop Prices Defy Economics
BY Diana B. Henriques  /  March 28, 2008

Economists note there should not be two prices for one thing at the
same place and time. Could a drugstore sell two identical tubes of
toothpaste, and charge 50 cents more for one of them? Of course not.
But, in effect, exactly that has been happening, repeatedly and
mysteriously, in trading that sets prices for corn, soybeans and wheat
— three of America’s biggest crops and, lately, popular targets for

investors pouring into the volatile commodities market. Economists who
have been studying this phenomenon say they are at a loss to explain
it.

Whatever the reason, the price for a bushel of grain set in the
derivatives markets has been substantially higher than the
simultaneous price in the cash market. When that happens, no one can
be exactly sure which is the accurate price in these crucial commodity
markets, an uncertainty that can influence food prices and production
decisions around the world.

These disparities also raise the question of whether American farmers,
who rely almost exclusively on the cash market, are being shortchanged
by cash prices that are lower than they should be. “We do not have a
clear understanding of what is driving these episodic instances,” said
Prof. Scott H. Irwin, one of three agricultural economists at the
University of Illinois at Urbana-Champaign who have done extensive
research on these price distortions.

Professor Irwin and his colleagues, Prof. Philip T. Garcia and Prof.
Darrel L. Good, first sounded the alarm about these price distortions
in late 2006 in a study financed by the Chicago Board of Trade. Their
findings drew little attention then, Professor Irwin said, but lately
“people have begun to get very seriously interested in why this is
happening — because it is a fundamental problem in markets that have
generally worked well in the past.”

Market regulators say they have ruled out deliberate market
manipulation. But they, too, are baffled. The Commodity Futures
Trading Commission, which regulates the exchanges where these grain
derivatives trade, has scheduled a forum on April 22 where market
participants will discuss these anomalies and other pressure points
arising in the agricultural markets. The mechanics of the commodity
markets are more complex than selling toothpaste, however. The
anomalies are occurring between the price of a bushel of grain in the
cash market and the price of that same bushel of grain, as determined
by the expiration price of a futures contract traded in Chicago.

A futures contract is an agreement to deliver a specific amount of a
commodity — 5,000 bushels of wheat, say — on a certain date in the
future. Such contracts are important hedging tools for farmers, grain
elevators, commodity processors and anyone with a stake in future
grain prices. A futures contract that calls for delivery of wheat in
July may trade for more or less for each bushel than today’s cash
market price. But as each day goes by, its price should move a bit
closer to that day’s cash price. And on expiration day, when the
bushels of wheat covered by that futures contract are due for
delivery, their price should very nearly match the price in the cash
market, allowing for a little market friction or major delivery
disruptions like Hurricane Katrina.

But on dozens of occasions since early 2006, the futures contracts for
corn, wheat and soybeans have expired at a price that was much higher
than that day’s cash price for those grains. For example, soybean
futures contracts expired in July at a price of $9.13 a bushel, which
was 80 cents higher than the cash price that day, Professor Irwin
said. In August, the futures expired at $8.62, or 68 cents above the
cash price, and in September, the expiration price was $9.43, or 78
cents above the cash price.

Corn has been similarly eccentric. A corn futures contract expired
last September at $3.36, which was a remarkable 55 cents above the
cash price, but the contract that expired in March 2007 was roughly
even with the cash price. “As far as I know, nothing like this has
ever happened in the corn market,” said Professor Irwin. Wheat futures
had been especially prone to this phenomenon, going back several
years. Indeed, the 2007 study by Professor Irwin and his colleagues
concluded that wheat price distortions reflected a “failure to
accomplish one of the fundamental tasks of a futures market.”

And while the situation improved sharply for wheat futures in Chicago
late last year, it deteriorated for futures traded in Kansas City. And

it has gotten worse for corn and soybeans, Professor Irwin said. Many
people have a theory about why this is happening, but none of them
seem to cover all the available facts. Mary Haffenberg, a spokeswoman
for the CME Group, which owns the Chicago Board of Trade, where these
contracts trade, said the anomalies might be a temporary result of “a
lot of shocks to the system,” including sharp increases in worldwide
food demand, uncertainty about supplies and surging commodity
investments.

Veteran traders and many farmers blame the new arrivals in the
commodities markets: hedge funds, pension funds and index funds. These
investors and speculators, they complain, are distorting futures
prices by pouring in so much money without regard to market
fundamentals. “The market sends a sell signal, but they don’t sell,”
said Kendell W. Keith, president of the National Grain and Feed
Association. “So the markets are not behaving the way they otherwise
would — and the pricing formula for the industry is a lot fuzzier and
a lot less efficient than we’ve ever seen.”

Representatives of the new financial speculators dispute that. Their
money has vastly increased the liquidity in the futures markets, they
say, and better liquidity improves markets, making them less volatile
for everyone. And, as Professor Irwin noted, if new money pouring into
the market has been causing these distortions, they probably would be
occurring more consistently than they are. Some experienced commodity
analysts think the flaw may be in the design of the contracts, said
Richard J. Feltes, senior vice president and director of commodity
research for MF Global, the world’s largest commodity futures
brokerage firm. If futures were settled based on a cash index, it
would eliminate these odd disparities, Mr. Feltes said.

Ms. Haffenberg at the CME Group said cash settlement had “not been
ruled out,” but it raised the question of finding the appropriate cash
index. Other modest contract changes are awaiting approval of the
futures trading commission, she said. “We are continuing to have
industry meetings to discuss what we need to do,” she said. “But we
want to be careful, before we undertake any changes, that above all,
we don’t do any harm.”

Moreover, defenders of the exchange’s current contract design note
that these widely used agreements have gone largely unchanged for some
time — and yet, have only begun to display this odd and inconsistent
behavior in the last few years. Some economists are exploring whether
some unperceived bottlenecks in the delivery system explain what is
going on. But traders say that such bottlenecks would eventually
become known in the market and prices would adjust. Professor Irwin,
whose research is continuing, said there might not be a single
explanation for the price distortions.

Markets may simply be responding to the uneven impact of new financial
technology, which allows more money to flow in and out, and to
investors’ growing but fluctuating appetite for hard assets. “Those
factors may be combining to create this highly volatile environment
for discovering prices,” he said. “But for now, that is pure
conjecture on my part.”

What is not happening in these markets is equally mysterious.
Normally, price disparities like these are quickly exploited by
arbitrage traders who buy goods in the cheap market and sell them in
the expensive one. Their buying and selling quickly brings the prices
back into balance — but that is not happening here. “These are highly
competitive markets with very experienced traders,” he said. “Yet they
are leaving these profits alone? It just doesn’t make sense.”

WAIT WHY’D THEY DO THAT?
http://www.voxeu.com/index.php?q=node/466
http://www.voxeu.org/index.php?q=node/505

SPECTRE OF DEPRESSION
HAUNTS FEDERAL RESERVE  (NO RELATION)
http://www.telegraph.co.uk/money/main.jhtml?menuId=242&menuItemId=10359&view=HEADLINESUMMARY&grid=F7&targetRule=14
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/22/ccom122.xml
BY Danny Gabay  /  23/03/2008

Over the past week, the Federal Reserve under Ben Bernanke has taken a
much more aggressive approach to the ongoing credit crisis. It
combined providing $30bn (£15.1bn) to help JP Morgan pick up the
remnants of Bear Sterns with widening the collateral pool it will
accept, extending the period at which it is prepared to lend this new
money, and narrowing the discount spread, with a 75 basis point rate-
cut cherry on top.

As if that were not enough, the Office of Federal Housing Enterprise
Oversight (OFHEO) announced a cut in the surplus capital requirement
for the two government-sponsored bodies which back mortgages, known as
Fannie Mae and Freddie Mac. They say this will immediately inject up
to $200bn of liquidity to the mortgage-backed securities market, as
part of a combined package that could allow them to purchase or
guarantee about $2 trillion in mortgages this year.

This falls just short of throwing the proverbial kitchen sink at the
problem. The question is, will it work? The symbolism of using a
facility developed during the Great Depression, during which the
original JP Morgan made his name by buying up great swaths of the New
York stock market, will have been lost on no one.

But in reality we are thankfully a very long way from those dark days.
Just to put things into some sort of perspective, it is estimated that
around half of the banks that existed in America in 1929 had
disappeared by 1933 – 2,300 in 1931 alone. By contrast, the
delightfully-named Mortgage Lender Implode-O-Meter, which purports to
keep track of each US mortgage provider that “implodes”, says that
some 241 such institutions have hit the wall since late 2006.

Still, investors are clearly nervous. The euphoria which greeted the
smaller than expected cut in the US base rate has given way to more
sombre analysis, as investors have found themselves tripping over
rumours of more and more banks in trouble. Those who have a more
fatalistic outlook might be reminded of the old Jewish joke about a
rabbi who falls out of a 20th-storey window and, as he passes each
floor, mutters to himself: “So far, so good.”

As the crisis has deepened and widened, it can be easy to lose sight
of its original sources: the underlying value of the US housing stock,
the debt accumulated against it, and the willingness of commercial
banks to do business with each other. The number of US houses
completed and now ready for sale stands at around double its
historical average. During the past two US housing downturns, neither
of which was as deep as the present one, completions fell by around
35pc peak to trough.

From today’s level, a similar-sized fall would still leave the stock
of unsold homes higher than the two previous peaks. And while that
oversupply overhang persists, it can create a negative feedback loop,
undermining any recovery. The extent of the overhang today suggests
that it could weigh down the US housing market, and hence the US
consumer, for a long time to come.

An obvious analogy is with the UK in the wake of the early 1990s
housing crash. The level of house prices peaked in the summer of 1989,
and did not rise again until 1996. That may sound unduly negative, but
in fact it probably represents a pretty optimistic outcome for the US.
During that period, the UK managed to rebalance its wayward economy
and fiscal position, as domestic demand grew by less than GDP,
allowing the current account to heal. But it was also a period during
which many economists, journalists and politicians bemoaned the lack
of a so-called “feel-good factor”, as a depressed housing market
weighed on consumer sentiment, even though the economy was growing and
unemployment was falling.

Turning to the wider financial market, evaporation of liquidity in the
interbank market last summer was the first real indication of the
potential scale of this problem. Central banks have approached the
problem in different ways.

The European Central Bank led the charge to inject liquidity last
summer, and continues to view the issue as primarily one of
insufficient liquidity. The Fed, by contrast, perhaps because it is
much closer to the eye of the storm, appeared at first to be more
focused on preventing a liquidity crisis from spilling over into a
macroeconomic crisis, but has since adopted many measures similar to
those already deployed by the ECB.

As usual, the UK position sits somewhere between the two. The Bank
of England has, thankfully, abandoned all talk of moral hazard. As it
found out last week, when it was overwhelmed by demand for the
additional funds it made available to the market, the problem did not
go away with Northern Rock.

In fact, despite all that has been done, said and nationalised, the so-
called interbank spread – the difference between the rate set by the
central bank and the rate at which commercial banks will lend to each
other – remains elevated in US, UK and European markets. Hence the
interbank market remains in distress.

Some have argued that the relative lack of success of either the Fed
or the ECB strategy is a reason to do less. Others have gone further
and argued that central banks should stand aside and let profligate
lenders sink, to cleanse or purge the system.

Bernanke is a keen student of the 1930s, and if we have learned one
thing above all from the Great Depression, it is that the middle of a
banking crisis is not the time to be searching for the moral high
ground. Indeed, there are a number of tentative reasons to think the
Fed’s latest salvo may eventually come to be seen as the point at
which the tide began to turn in its favour.

{Danny Gabay is founder director of Fathom Financial Consulting.}

EMPIRE AS BUSINESS MODEL
http://www.energybulletin.net/12125.html
The Proposed Iranian Oil Bourse
BY Krassimir Petrov  /  17 Jan 2006

I. Economics of Empires

A nation-state taxes its own citizens, while an empire taxes other
nation-states. The history of empires, from Greek and Roman, to
Ottoman and British, teaches that the economic foundation of every
single empire is the taxation of other nations. The imperial ability
to tax has always rested on a better and stronger economy, and as a
consequence, a better and stronger military. One part of the subject
taxes went to improve the living standards of the empire; the other
part went to strengthen the military dominance necessary to enforce
the collection of those taxes.

Historically, taxing the subject state has been in various forms—
usually gold and silver, where those were considered money, but also
slaves, soldiers, crops, cattle, or other agricultural and natural
resources, whatever economic goods the empire demanded and the subject-
state could deliver. Historically, imperial taxation has always been
direct: the subject state handed over the economic goods directly to
the empire.

For the first time in history, in the twentieth century, America was
able to tax the world indirectly, through inflation. It did not
enforce the direct payment of taxes like all of its predecessor
empires did, but distributed instead its own fiat currency, the U.S.
Dollar, to other nations in exchange for goods with the intended
consequence of inflating and devaluing those dollars and paying back
later each dollar with less economic goods—the difference capturing
the U.S. imperial tax. Here is how this happened.

Early in the 20th century, the U.S. economy began to dominate the
world economy. The U.S. dollar was tied to gold, so that the value of
the dollar neither increased, nor decreased, but remained the same
amount of gold. The Great Depression, with its preceding inflation
from 1921 to 1929 and its subsequent ballooning government deficits,
had substantially increased the amount of currency in circulation, and
thus rendered the backing of U.S. dollars by gold impossible. This led
Roosevelt to decouple the dollar from gold in 1932. Up to this point,
the U.S. may have well dominated the world economy, but from an
economic point of view, it was not an empire. The fixed value of the
dollar did not allow the Americans to extract economic benefits from
other countries by supplying them with dollars convertible to gold.

Economically, the American Empire was born with Bretton Woods in 1945.
The U.S. dollar was not fully convertible to gold, but was made
convertible to gold only to foreign governments. This established the
dollar as the reserve currency of the world. It was possible, because
during WWII, the United States had supplied its allies with
provisions, demanding gold as payment, thus accumulating significant
portion of the world’s gold. An Empire would not have been possible
if, following the Bretton Woods arrangement, the dollar supply was
kept limited and within the availability of gold, so as to fully
exchange back dollars for gold. However, the guns-and-butter policy of
the 1960’s was an imperial one: the dollar supply was relentlessly
increased to finance Vietnam and LBJ’s Great Society. Most of those
dollars were handed over to foreigners in exchange for economic goods,
without the prospect of buying them back at the same value. The
increase in dollar holdings of foreigners via persistent U.S. trade
deficits was tantamount to a tax—the classical inflation tax that a
country imposes on its own citizens, this time around an inflation tax
that U.S. imposed on rest of the world.

When in 1970-1971 foreigners demanded payment for their dollars in
gold, The U.S. Government defaulted on its payment on August 15, 1971.
While the popular spin told the story of “severing the link between
the dollar and gold”, in reality the denial to pay back in gold was an
act of bankruptcy by the U.S. Government. Essentially, the U.S.
declared itself an Empire. It had extracted an enormous amount of
economic goods from the rest of the world, with no intention or
ability to return those goods, and the world was powerless to respond—
the world was taxed and it could not do anything about it.

From that point on, to sustain the American Empire and to continue to
tax the rest of the world, the United States had to force the world to
continue to accept ever-depreciating dollars in exchange for economic
goods and to have the world hold more and more of those depreciating
dollars. It had to give the world an economic reason to hold them, and
that reason was oil.

In 1971, as it became clearer and clearer that the U.S Government
would not be able to buy back its dollars in gold, it made in 1972-73
an iron-clad arrangement with Saudi Arabia to support the power of the
House of Saud in exchange for accepting only U.S. dollars for its oil.
The rest of OPEC was to follow suit and also accept only dollars.
Because the world had to buy oil from the Arab oil countries, it had
the reason to hold dollars as payment for oil. Because the world
needed ever increasing quantities of oil at ever increasing oil
prices, the world’s demand for dollars could only increase. Even
though dollars could no longer be exchanged for gold, they were now
exchangeable for oil.

The economic essence of this arrangement was that the dollar was now
backed by oil. As long as that was the case, the world had to
accumulate increasing amounts of dollars, because they needed those
dollars to buy oil. As long as the dollar was the only acceptable
payment for oil, its dominance in the world was assured, and the
American Empire could continue to tax the rest of the world. If, for
any reason, the dollar lost its oil backing, the American Empire would
cease to exist. Thus, Imperial survival dictated that oil be sold only
for dollars. It also dictated that oil reserves were spread around
various sovereign states that weren’t strong enough, politically or
militarily, to demand payment for oil in something else. If someone
demanded a different payment, he had to be convinced, either by
political pressure or military means, to change his mind.

The man that actually did demand Euro for his oil was Saddam Hussein
in 2000. At first, his demand was met with ridicule, later with
neglect, but as it became clearer that he meant business, political
pressure was exerted to change his mind. When other countries, like
Iran, wanted payment in other currencies, most notably Euro and Yen,
the danger to the dollar was clear and present, and a punitive action
was in order. Bush’s Shock-and-Awe in Iraq was not about Saddam’s
nuclear capabilities, about defending human rights, about spreading
democracy, or even about seizing oil fields; it was about defending
the dollar, ergo the American Empire. It was about setting an example
that anyone who demanded payment in currencies other than U.S. Dollars
would be likewise punished.

Many have criticized Bush for staging the war in Iraq in order to
seize Iraqi oil fields. However, those critics can’t explain why Bush
would want to seize those fields—he could simply print dollars for
nothing and use them to get all the oil in the world that he needs. He
must have had some other reason to invade Iraq.

History teaches that an empire should go to war for one of two
reasons: (1) to defend itself or (2) benefit from war; if not, as Paul
Kennedy illustrates in his magisterial The Rise and Fall of the Great
Powers, a military overstretch will drain its economic resources and
precipitate its collapse. Economically speaking, in order for an
empire to initiate and conduct a war, its benefits must outweigh its
military and social costs. Benefits from Iraqi oil fields are hardly
worth the long-term, multi-year military cost. Instead, Bush must have
went into Iraq to defend his Empire. Indeed, this is the case: two
months after the United States invaded Iraq, the Oil for Food Program
was terminated, the Iraqi Euro accounts were switched back to dollars,
and oil was sold once again only for U.S. dollars. No longer could the
world buy oil from Iraq with Euro. Global dollar supremacy was once
again restored. Bush descended victoriously from a fighter jet and
declared the mission accomplished—he had successfully defended the
U.S. dollar, and thus the American Empire.

II. Iranian Oil Bourse

The Iranian government has finally developed the ultimate “nuclear”
weapon that can swiftly destroy the financial system underpinning the
American Empire. That weapon is the Iranian Oil Bourse slated to open
in March 2006. It will be based on a euro-oil-trading mechanism that
naturally implies payment for oil in Euro. In economic terms, this
represents a much greater threat to the hegemony of the dollar than
Saddam’s, because it will allow anyone willing either to buy or to
sell oil for Euro to transact on the exchange, thus circumventing the
U.S. dollar altogether. If so, then it is likely that almost everyone
will eagerly adopt this euro oil system:

· The Europeans will not have to buy and hold dollars in order to
secure their payment for oil, but would instead pay with their own
currencies. The adoption of the euro for oil transactions will provide
the European currency with a reserve status that will benefit the
European at the expense of the Americans.

· The Chinese and the Japanese will be especially eager to adopt the
new exchange, because it will allow them to drastically lower their
enormous dollar reserves and diversify with Euros, thus protecting
themselves against the depreciation of the dollar. One portion of
their dollars they will still want to hold onto; a second portion of
their dollar holdings they may decide to dump outright; a third
portion of their dollars they will decide to use up for future
payments without replenishing those dollar holdings, but building up
instead their euro reserves.

· The Russians have inherent economic interest in adopting the Euro –
the bulk of their trade is with European countries, with oil-exporting
countries, with China, and with Japan. Adoption of the Euro will
immediately take care of the first two blocs, and will over time
facilitate trade with China and Japan. Also, the Russians seemingly
detest holding depreciating dollars, for they have recently found a
new religion with gold. Russians have also revived their nationalism,
and if embracing the Euro will stab the Americans, they will gladly do
it and smugly watch the Americans bleed.

· The Arab oil-exporting countries will eagerly adopt the Euro as a
means of diversifying against rising mountains of depreciating
dollars. Just like the Russians, their trade is mostly with European
countries, and therefore will prefer the European currency both for
its stability and for avoiding currency risk, not to mention their
jihad against the Infidel Enemy.

Only the British will find themselves between a rock and a hard place.
They have had a strategic partnership with the U.S. forever, but have
also had their natural pull from Europe. So far, they have had many
reasons to stick with the winner. However, when they see their century-
old partner falling, will they firmly stand behind him or will they
deliver the coup de grace? Still, we should not forget that currently
the two leading oil exchanges are the New York’s NYMEX and the
London’s International Petroleum Exchange (IPE), even though both of
them are effectively owned by the Americans. It seems more likely that
the British will have to go down with the sinking ship, for otherwise
they will be shooting themselves in the foot by hurting their own
London IPE interests. It is here noteworthy that for all the rhetoric
about the reasons for the surviving British Pound, the British most
likely did not adopt the Euro namely because the Americans must have
pressured them not to: otherwise the London IPE would have had to
switch to Euros, thus mortally wounding the dollar and their strategic
partner.

At any rate, no matter what the British decide, should the Iranian Oil
Bourse accelerate, the interests that matter—those of Europeans,
Chinese, Japanese, Russians, and Arabs—will eagerly adopt the Euro,
thus sealing the fate of the dollar. Americans cannot allow this to
happen, and if necessary, will use a vast array of strategies to halt
or hobble the operation’s exchange:

· Sabotaging the Exchange—this could be a computer virus, network,
communications, or server attack, various server security breaches, or
a 9-11-type attack on main and backup facilities.

· Coup d’état—this is by far the best long-term strategy available to
the Americans.

· Negotiating Acceptable Terms & Limitations—this is another excellent
solution to the Americans. Of course, a government coup is clearly the
preferred strategy, for it will ensure that the exchange does not
operate at all and does not threaten American interests. However, if
an attempted sabotage or coup d’etat fails, then negotiation is
clearly the second-best available option.

· Joint U.N. War Resolution—this will be, no doubt, hard to secure
given the interests of all other member-states of the Security
Council. Feverish rhetoric about Iranians developing nuclear weapons
undoubtedly serves to prepare this course of action.

· Unilateral Nuclear Strike—this is a terrible strategic choice for
all the reasons associated with the next strategy, the Unilateral
Total War. The Americans will likely use Israel to do their dirty
nuclear job.

· Unilateral Total War—this is obviously the worst strategic choice.
First, the U.S. military resources have been already depleted with two
wars. Secondly, the Americans will further alienate other powerful
nations. Third, major dollar-holding countries may decide to quietly
retaliate by dumping their own mountains of dollars, thus preventing
the U.S. from further financing its militant ambitions. Finally, Iran
has strategic alliances with other powerful nations that may trigger
their involvement in war; Iran reputedly has such alliance with China,
India, and Russia, known as the Shanghai Cooperative Group, a.k.a.
Shanghai Coop and a separate pact with Syria.

Whatever the strategic choice, from a purely economic point of view,
should the Iranian Oil Bourse gain momentum, it will be eagerly
embraced by major economic powers and will precipitate the demise of
the dollar. The collapsing dollar will dramatically accelerate U.S.
inflation and will pressure upward U.S. long-term interest rates. At
this point, the Fed will find itself between Scylla and Charybdis—
between deflation and hyperinflation—it will be forced fast either to
take its “classical medicine” by deflating, whereby it raises interest
rates, thus inducing a major economic depression, a collapse in real
estate, and an implosion in bond, stock, and derivative markets, with
a total financial collapse, or alternatively, to take the Weimar way
out by inflating, whereby it pegs the long-bond yield, raises the
Helicopters and drowns the financial system in liquidity, bailing out
numerous LTCMs and hyperinflating the economy.

The Austrian theory of money, credit, and business cycles teaches us
that there is no in-between Scylla and Charybdis. Sooner or later, the
monetary system must swing one way or the other, forcing the Fed to
make its choice. No doubt, Commander-in-Chief Ben Bernanke, a renowned
scholar of the Great Depression and an adept Black Hawk pilot, will
choose inflation. Helicopter Ben, oblivious to Rothbard’s America’s
Great Depression, has nonetheless mastered the lessons of the Great
Depression and the annihilating power of deflations. The Maestro has
taught him the panacea of every single financial problem—to inflate,
come hell or high water. He has even taught the Japanese his own
ingenious unconventional ways to battle the deflationary liquidity
trap. Like his mentor, he has dreamed of battling a Kondratieff
Winter. To avoid deflation, he will resort to the printing presses; he
will recall all helicopters from the 800 overseas U.S. military bases;
and, if necessary, he will monetize everything in sight. His ultimate
accomplishment will be the hyperinflationary destruction of the
American currency and from its ashes will rise the next reserve
currency of the world—that barbarous relic called gold.

.

About the Author
Krassimir Petrov (Krassimir_Petrov [at] hotmail [dot] com) has received his Ph.
D. in economics from the Ohio State University and currently teaches
Macroeconomics, International Finance, and Econometrics at the
American University in Bulgaria. He is looking for a career in Dubai
or the U. A. E.

BUFFETT’S OUT
http://www.pbs.org/wsw/news/fortunearticle_20031026_03.html
[GAVE ALL HIS MONEY AWAY WHILE IT WAS WORTH SOMETHING…]
America’s growing trade deficit is selling the nation out from under
us. Here’s a way to fix the problem — and we need to do it now.

Why I’m not buying the U.S. dollar
BY Warren E. Buffett  /  Oct. 26, 2003

I’m about to deliver a warning regarding the U.S. trade deficit and
also suggest a remedy for the problem. But first I need to mention two
reasons you might want to be skeptical about what I say. To begin, my
forecasting record with respect to macroeconomics is far from
inspiring. For example, over the past two decades I was excessively
fearful of inflation. More to the point at hand, I started way back in
1987 to publicly worry about our mounting trade deficits — and, as
you know, we’ve not only survived but also thrived. So on the trade
front, score at least one “wolf” for me. Nevertheless, I am crying
wolf again and this time backing it with Berkshire Hathaway’s money.
Through the spring of 2002, I had lived nearly 72 years without
purchasing a foreign currency. Since then Berkshire has made
significant investments in — and today holds — several currencies. I
won’t give you particulars; in fact, it is largely irrelevant which
currencies they are. What does matter is the underlying point: To hold
other currencies is to believe that the dollar will decline.

Both as an American and as an investor, I actually hope these
commitments prove to be a mistake. Any profits Berkshire might make
from currency trading would pale against the losses the company and
our shareholders, in other aspects of their lives, would incur from a
plunging dollar.

But as head of Berkshire Hathaway, I am in charge of investing its
money in ways that make sense. And my reason for finally putting my
money where my mouth has been so long is that our trade deficit has
greatly worsened, to the point that our country’s “net worth,” so to
speak, is now being transferred abroad at an alarming rate.

A perpetuation of this transfer will lead to major trouble. To
understand why, take a wildly fanciful trip with me to two isolated,
side-by-side islands of equal size, Squanderville and Thriftville.
Land is the only capital asset on these islands, and their communities
are primitive, needing only food and producing only food. Working
eight hours a day, in fact, each inhabitant can produce enough food to
sustain himself or herself. And for a long time that’s how things go
along. On each island everybody works the prescribed eight hours a
day, which means that each society is self-sufficient.

Eventually, though, the industrious citizens of Thriftville decide to
do some serious saving and investing, and they start to work 16 hours
a day. In this mode they continue to live off the food they produce in
eight hours of work but begin exporting an equal amount to their one
and only trading outlet, Squanderville.

The citizens of Squanderville are ecstatic about this turn of events,
since they can now live their lives free from toil but eat as well as
ever. Oh, yes, there’s a quid pro quo — but to the Squanders, it
seems harmless: All that the Thrifts want in exchange for their food
is Squanderbonds (which are denominated, naturally, in Squanderbucks).

Over time Thriftville accumulates an enormous amount of these bonds,
which at their core represent claim checks on the future output of
Squanderville. A few pundits in Squanderville smell trouble coming.
They foresee that for the Squanders both to eat and to pay off — or
simply service — the debt they’re piling up will eventually require
them to work more than eight hours a day. But the residents of
Squanderville are in no mood to listen to such doomsaying.

Meanwhile, the citizens of Thriftville begin to get nervous. Just how
good, they ask, are the IOUs of a shiftless island? So the Thrifts
change strategy: Though they continue to hold some bonds, they sell
most of them to Squanderville residents for Squanderbucks and use the
proceeds to buy Squanderville land. And eventually the Thrifts own all
of Squanderville.

At that point, the Squanders are forced to deal with an ugly equation:
They must now not only return to working eight hours a day in order to
eat — they have nothing left to trade — but must also work
additional hours to service their debt and pay Thriftville rent on the
land so imprudently sold. In effect, Squanderville has been colonized
by purchase rather than conquest.

It can be argued, of course, that the present value of the future
production that Squanderville must forever ship to Thriftville only
equates to the production Thriftville initially gave up and that
therefore both have received a fair deal. But since one generation of
Squanders gets the free ride and future generations pay in perpetuity
for it, there are — in economist talk — some pretty dramatic
“intergenerational inequities.”

Let’s think of it in terms of a family: Imagine that I, Warren
Buffett, can get the suppliers of all that I consume in my lifetime to
take Buffett family IOUs that are payable, in goods and services and
with interest added, by my descendants. This scenario may be viewed as
effecting an even trade between the Buffett family unit and its
creditors. But the generations of Buffetts following me are not likely
to applaud the deal (and, heaven forbid, may even attempt to welsh on
it).

Think again about those islands: Sooner or later the Squanderville
government, facing ever greater payments to service debt, would decide
to embrace highly inflationary policies — that is, issue more
Squanderbucks to dilute the value of each. After all, the government
would reason, those irritating Squanderbonds are simply claims on
specific numbers of Squanderbucks, not on bucks of specific value. In
short, making Squanderbucks less valuable would ease the island’s
fiscal pain.

That prospect is why I, were I a resident of Thriftville, would opt
for direct ownership of Squanderville land rather than bonds of the
island’s government. Most governments find it much harder morally to
seize foreign-owned property than they do to dilute the purchasing
power of claim checks foreigners hold. Theft by stealth is preferred
to theft by force.

So what does all this island hopping have to do with the U.S.? Simply
put, after World War II and up until the early 1970s we operated in
the industrious Thriftville style, regularly selling more abroad than
we purchased. We concurrently invested our surplus abroad, with the
result that our net investment — that is, our holdings of foreign
assets less foreign holdings of U.S. assets — increased (under
methodology, since revised, that the government was then using) from
$37 billion in 1950 to $68 billion in 1970. In those days, to sum up,
our country’s “net worth,” viewed in totality, consisted of all the
wealth within our borders plus a modest portion of the wealth in the
rest of the world.

Additionally, because the U.S. was in a net ownership position with
respect to the rest of the world, we realized net investment income
that, piled on top of our trade surplus, became a second source of
investable funds. Our fiscal situation was thus similar to that of an
individual who was both saving some of his salary and reinvesting the
dividends from his existing nest egg.

In the late 1970s the trade situation reversed, producing deficits
that initially ran about 1 percent of GDP. That was hardly serious,
particularly because net investment income remained positive. Indeed,
with the power of compound interest working for us, our net ownership
balance hit its high in 1980 at $360 billion.

Since then, however, it’s been all downhill, with the pace of decline
rapidly accelerating in the past five years. Our annual trade deficit
now exceeds 4 percent of GDP. Equally ominous, the rest of the world
owns a staggering $2.5 trillion more of the U.S. than we own of other
countries. Some of this $2.5 trillion is invested in claim checks —
U.S. bonds, both governmental and private — and some in such assets
as property and equity securities.

In effect, our country has been behaving like an extraordinarily rich
family that possesses an immense farm. In order to consume 4 percent
more than we produce — that’s the trade deficit — we have, day by
day, been both selling pieces of the farm and increasing the mortgage
on what we still own.

To put the $2.5 trillion of net foreign ownership in perspective,
contrast it with the $12 trillion value of publicly owned U.S. stocks
or the equal amount of U.S. residential real estate or what I would
estimate as a grand total of $50 trillion in national wealth. Those
comparisons show that what’s already been transferred abroad is
meaningful — in the area, for example, of 5 percent of our national
wealth.

More important, however, is that foreign ownership of our assets will
grow at about $500 billion per year at the present trade-deficit
level, which means that the deficit will be adding about one
percentage point annually to foreigners’ net ownership of our national
wealth. As that ownership grows, so will the annual net investment
income flowing out of this country. That will leave us paying ever-
increasing dividends and interest to the world rather than being a net
receiver of them, as in the past. We have entered the world of
negative compounding — goodbye pleasure, hello pain.

We were taught in Economics 101 that countries could not for long
sustain large, ever-growing trade deficits. At a point, so it was
claimed, the spree of the consumption-happy nation would be braked by
currency-rate adjustments and by the unwillingness of creditor
countries to accept an endless flow of IOUs from the big spenders. And
that’s the way it has indeed worked for the rest of the world, as we
can see by the abrupt shutoffs of credit that many profligate nations
have suffered in recent decades.

The U.S., however, enjoys special status. In effect, we can behave
today as we wish because our past financial behavior was so exemplary
— and because we are so rich. Neither our capacity nor our intention
to pay is questioned, and we continue to have a mountain of desirable
assets to trade for consumables. In other words, our national credit
card allows us to charge truly breathtaking amounts. But that card’s
credit line is not limitless.

The time to halt this trading of assets for consumables is now, and I
have a plan to suggest for getting it done. My remedy may sound
gimmicky, and in truth it is a tariff called by another name. But this
is a tariff that retains most free-market virtues, neither protecting
specific industries nor punishing specific countries nor encouraging
trade wars. This plan would increase our exports and might well lead
to increased overall world trade. And it would balance our books
without there being a significant decline in the value of the dollar,
which I believe is otherwise almost certain to occur.

We would achieve this balance by issuing what I will call Import
Certificates (ICs) to all U.S. exporters in an amount equal to the
dollar value of their exports. Each exporter would, in turn, sell the
ICs to parties — either exporters abroad or importers here — wanting
to get goods into the U.S. To import $1 million of goods, for example,
an importer would need ICs that were the byproduct of $1 million of
exports. The inevitable result: trade balance.

Because our exports total about $80 billion a month, ICs would be
issued in huge, equivalent quantities — that is, 80 billion
certificates a month — and would surely trade in an exceptionally
liquid market. Competition would then determine who among those
parties wanting to sell to us would buy the certificates and how much
they would pay. (I visualize that the certificates would be issued
with a short life, possibly of six months, so that speculators would
be discouraged from accumulating them.)

For illustrative purposes, let’s postulate that each IC would sell for
10 cents — that is, 10 cents per dollar of exports behind them. Other
things being equal, this amount would mean a U.S. producer could
realize 10 percent more by selling his goods in the export market than
by selling them domestically, with the extra 10 percent coming from
his sales of ICs.

In my opinion, many exporters would view this as a reduction in cost,
one that would let them cut the prices of their products in
international markets. Commodity-type products would particularly
encourage this kind of behavior. If aluminum, for example, was selling
for 66 cents per pound domestically and ICs were worth 10 percent,
domestic aluminum producers could sell for about 60 cents per pound
(plus transportation costs) in foreign markets and still earn normal
margins. In this scenario, the output of the U.S. would become
significantly more competitive and exports would expand. Along the
way, the number of jobs would grow.

Foreigners selling to us, of course, would face tougher economics. But
that’s a problem they’re up against no matter what trade “solution” is
adopted — and make no mistake, a solution must come. (As Herb Stein
said, “If something cannot go on forever, it will stop.”) In one way
the IC approach would give countries selling to us great flexibility,
since the plan does not penalize any specific industry or product. In
the end, the free market would determine what would be sold in the
U.S. and who would sell it. The ICs would determine only the aggregate
dollar volume of what was sold.

To see what would happen to imports, let’s look at a car now entering
the U.S. at a cost to the importer of $20,000. Under the new plan and
the assumption that ICs sell for 10 percent, the importer’s cost would
rise to $22,000. If demand for the car was exceptionally strong, the
importer might manage to pass all of this on to the American consumer.
In the usual case, however, competitive forces would take hold,
requiring the foreign manufacturer to absorb some, if not all, of the
$2,000 IC cost.

There is no free lunch in the IC plan: It would have certain serious
negative consequences for U.S. citizens. Prices of most imported
products would increase, and so would the prices of certain
competitive products manufactured domestically. The cost of the ICs,
either in whole or in part, would therefore typically act as a tax on
consumers.

That is a serious drawback. But there would be drawbacks also to the
dollar continuing to lose value or to our increasing tariffs on
specific products or instituting quotas on them — courses of action
that in my opinion offer a smaller chance of success. Above all, the
pain of higher prices on goods imported today dims beside the pain we
will eventually suffer if we drift along and trade away ever larger
portions of our country’s net worth.

I believe that ICs would produce, rather promptly, a U.S. trade
equilibrium well above present export levels but below present import
levels. The certificates would moderately aid all our industries in
world competition, even as the free market determined which of them
ultimately met the test of “comparative advantage.”

This plan would not be copied by nations that are net exporters,
because their ICs would be valueless. Would major exporting countries
retaliate in other ways? Would this start another Smoot-Hawley tariff
war? Hardly. At the time of Smoot-Hawley we ran an unreasonable trade
surplus that we wished to maintain. We now run a damaging deficit that
the whole world knows we must correct.

For decades the world has struggled with a shifting maze of punitive
tariffs, export subsidies, quotas, dollar-locked currencies, and the
like. Many of these import-inhibiting and export-encouraging devices
have long been employed by major exporting countries trying to amass
ever larger surpluses — yet significant trade wars have not erupted.
Surely one will not be precipitated by a proposal that simply aims at
balancing the books of the world’s largest trade debtor. Major
exporting countries have behaved quite rationally in the past and they
will continue to do so — though, as always, it may be in their
interest to attempt to convince us that they will behave otherwise.

The likely outcome of an IC plan is that the exporting nations —
after some initial posturing — will turn their ingenuity to
encouraging imports from us. Take the position of China, which today
sells us about $140 billion of goods and services annually while
purchasing only $25 billion. Were ICs to exist, one course for China
would be simply to fill the gap by buying 115 billion certificates
annually. But it could alternatively reduce its need for ICs by
cutting its exports to the U.S. or by increasing its purchases from
us. This last choice would probably be the most palatable for China,
and we should wish it to be so.

If our exports were to increase and the supply of ICs were therefore
to be enlarged, their market price would be driven down. Indeed, if
our exports expanded sufficiently, ICs would be rendered valueless and
the entire plan made moot. Presented with the power to make this
happen, important exporting countries might quickly eliminate the
mechanisms they now use to inhibit exports from us.

Were we to install an IC plan, we might opt for some transition years
in which we deliberately ran a relatively small deficit, a step that
would enable the world to adjust as we gradually got where we need to
be. Carrying this plan out, our government could either auction
“bonus” ICs every month or simply give them, say, to less-developed
countries needing to increase their exports. The latter course would
deliver a form of foreign aid likely to be particularly effective and
appreciated.

I will close by reminding you again that I cried wolf once before. In
general, the batting average of doomsayers in the U.S. is terrible.
Our country has consistently made fools of those who were skeptical
about either our economic potential or our resiliency. Many
pessimistic seers simply underestimated the dynamism that has allowed
us to overcome problems that once seemed ominous. We still have a
truly remarkable country and economy.

But I believe that in the trade deficit we also have a problem that is
going to test all of our abilities to find a solution. A gently
declining dollar will not provide the answer. True, it would reduce
our trade deficit to a degree, but not by enough to halt the outflow
of our country’s net worth and the resulting growth in our investment-
income deficit.

Perhaps there are other solutions that make more sense than mine.
However, wishful thinking — and its usual companion, thumb sucking —
is not among them. From what I now see, action to halt the rapid
outflow of our national wealth is called for, and ICs seem the least
painful and most certain way to get the job done. Just keep
remembering that this is not a small problem: For example, at the rate
at which the rest of the world is now making net investments in the
U.S., it could annually buy and sock away nearly 4 percent of our
publicly traded stocks.

In evaluating business options at Berkshire, my partner, Charles
Munger, suggests that we pay close attention to his jocular wish: “All
I want to know is where I’m going to die, so I’ll never go there.”
Framers of our trade policy should heed this caution — and steer
clear of Squanderville.

U.S. BANKRUPT SINCE 1971?
Summary in one paragraph: “This is the leader of the Swedish Pirate
Party explaining how the US went bankrupt in 1971, and has been
covering it up through an accelerating whack-a-mole borrowing frenzy
that is bursting right now. It has been paying rapidly growing VISA
bills using MasterCard and vice versa for 37 years. The creditors are
catching up, and the US is about to go extinct as a superpower. Become
irrelevant. It is not yet on its death bed, it is still walking,
breathing and capable of entertaining a conversation in public. But
there are ominous bloodstains on its hands used to cover the painful
coughing.”

MEASURING ONE’S ‘COLLAPSE GAP’
http://www.falkvinge.com/2008/03/why-us-is-collapsing.html
Why the US is collapsing
BY Rick Falkvinge  /  March 22, 2008

Last summer, I wrote (in Swedish) about how the US is in grave danger
of becoming the Fourth Reich. I also said that such a state would not
last for more than 15 years, because of a number of factors I would
elaborate on later.

I was right about the sequence of events, but horribly off on the
timing. Where I had expected them to happen gradually in about ten or
15 years, instead they are unfolding before my eyes at an accelerating
pace.

Some people believe that pirate politics is somehow about the right to
obtain music and movies without paying. Some, a bit more initiated,
believe it is for fight for civil liberties. In that, they are
correct. But few understand the scope of this fight. It is not against
the music industry. It is not against entertainment cartels.

I see the pirate fight as being against corrupt governments that
systematically curtail civil liberties as the primary and only defense
of a gigantic and growing financial bubble, built over four decades. A
fight against a small elite that are literally killing people to be
able to keep living in luxury without paying the bills for it. Some
bloggers have called this Fascism 2.0. The entertainment cartels are
just a small part of this bubble, and fascism is used here in its most
lexical sense.

fascism n. a merging of the interests of big corporations and
government, adjoined with a systematic curtailment of civil liberties

In order to understand what pirate politics are really about, you need
to understand global economic politics in ways that most people will
never encounter. You need to understand the gold coin of Bretton-
Woods, Toyota’s impact on Detroit, the strategic dollar advantage of
the Marshall Plan, why the WTO and UN WIPO are rivals, how and why the
US uses threats of trade sanctions, and how money is created and
ceases to exist on today’s financial markets. I will cover the basics
in this blog post.

The most prominent of these bubble-pumping governments is the US. And
their bubble is bursting. The dollar is not just falling in exchange
rate, as in “oh, the curves are on a downslope, interesting, btw I
wonder what’s for lunch today”. The US dollars are about to become as
irrelevant as the rubles, the deutschmarks, and the sesertii.

For these empires – the Soviet, German and Roman empire – followed the
exact same pattern. And if history is a teacher, future empires will
do so too.

THE DOLLAR BUBBLE
Part I: Background

Some of you may have noticed that the dollar has lost some of its
value against other currencies, the euro in particular. Usually, with
a healthy currency, this would not be a cause for alarm, other that a
sign that the American households might be overborrowing and
overmortgaging, and thus increasing the money supply, causing the rate
to fall due to supply/demand rules.

It is much more serious than that.

Let’s go back to 1947. The US did two extremely strategic moves at
that point. One was called The Marshall Plan and looked like charity,
giving money away to all of war-torn Europe, officially to help repel
communism.

Three years prior, it had established the Bretton Woods system, which
put the US Dollar at the center of rebuilding the countries, and
guaranteed an exchange in gold for the US Dollar. Every 35 US Dollars
would be exchangable and refundable with one ounce in gold.

I genuinely believe that these two deals were good for everybody
involved. The ruined Europe got a foundation for rebuilding its
nations.

But what the US accomplished was much more important than that: it
succeeded in making its own currency into a world currency. The dollar
became the trade standard.

This status is extremely important. In fact, it carries the entire US
economy and its continuous overspending. Let’s stop for a moment to
understand why.

Every nation has a currency reserve today. Savings in a piggy bank, if
you like. This currency reserve was filled with the world’s most
stable and standard currency, the dollar.

Let’s take that again: every nation has been buying dollars for the
past 60 years just to stockpile it, because the US Dollar has been the
standard currency.

And since they are buying the dollar, this means that the US is
getting something else of value in return. In effect, the US has been
able to print money at a rate that outpaces its industrial production,
just because countries have been buying its currency.

At the end of 2007, this stockpile across the world was two and a half
trillion dollars. More specifically, it was 2,445,180 million dollars.

What this means, is that unless the US has an equivalent on two and a
half trillion dollars in cash on hand, which it absolutely doesn’t,
the US has consumed goods and services for two and a half trillion
dollars that are not yet paid for. The countries bought dollars in
exchange for yen-or-whatever, the US bought shiny toys for the yen-or-
whatever, and never gave it a second thought.

This is like going on a shopping spree and paying with checks, and
having the luxury of the checks never arriving at the bank to charge
the account.

But the checks for that two and a half trillion dollars haven’t
vanished. They are sitting in vaults. And they are starting to trickle
in to the bank. A barely noticeable dripping at first, it is now
starting to turn into a small stream, and once people figure out what
is happening, it’s going to be a burst dam torrenting down the valley
of global finance.

How much is two and a half trillion dollars? Actually, it isn’t a lot
of money in the global economy. It’s about $7,500 for every man, woman
and child in the US. It is about four years’ worth of American
military spending. It’s about one-quarter of the American GDP.

The key here, however, is not how much money it is. It is that there
is no financial coverage for it. Spending $1,000 on a TV set isn’t a
lot of money, but it can cause a lot of bad consequences for you and
your standing if you don’t happen to have those $1,000, and no more
creditors are willing to lend you a hand.

And the US is running out of new creditors fast.

DUMPING GOLD
Part II: The war bankrupted the US

I wrote previously, that under the Bretton-Woods agreement, the dollar
was essentially an IOU. A loan paper, an obligation to the US. Every
35 dollars was good for one ounce of gold, to be paid at any time of
the creditor’s choosing. However, the war tore through the American
economy like a plough through a golf course. At the start of the war,
the gold coverage was 55%, which is healthy by modern bank standards.
During just 1970, however, that coverage dwindled from 55% to 22%.

Wait. 1970? Right. I’m not talking about Iraq. I’m talking about
Vietnam.

At this point, economists no longer believed in the US’ capacity of
regulating its expenditure and making good on its promises.
International pressure mounted to exchange dollars for the promised
gold, particularly from France, which converted large amounts of its
dollar currency reserves into gold at this time. It was a run on the
bank to withdraw the savings while the bank was still alive.

On August 15, 1971, president Nixon declared bankruptcy. It wasn’t
worded like that, of course. But what Nixon did was to state that the
US would no longer honor its creditors and pay gold for the dollar. He
declared the credit documents invalid. This event has been dubbed The
Nixon Shock. In any other milieu, cancelling payments is the same as
declaring bankruptcy. Here, it was “just an executive order”, and the
world at large didn’t really appreciate its consequences.

One such consequence was that the US was free to print as much money
as anyone was willing to buy, inflating the bubble without any check,
balance, or irritating warning light.

At the end of 1995, the foreign US Dollar stockpile was 610,337
million dollars. As I wrote earlier, today that number has grown to
2,445,180 million. That’s close to two trillion in 13 years. A
fourfolding of the debt. A 300% increase. Who is buying all of these
dollars?

Asian countries, it turns out. A small handful of countries have been
derogatorily called ODIC – Organization of Dollar Importing Countries.

The U.S. trade deficit was 763.6 billion dollars in 2006. This means
that the United States bought goods and services for three-quarters of
a trillion more than it was able to sell to other countries. Where did
the US get three-quarters of a trillion dollars to fund this trade
deficit in 2006? And an equal amount in 2007? And 2005?

You should start to get the answer by now. It didn’t. Part of it came
for printing money for foreign cash reserves, predominantly Asian
ones. In any case, the US spent that money anyway.

To put this in context, in a list of global trade balances for 164
countries, the US is at the bottom of the list. The worst of all
measured countries.

Not only that, but the silver medal goes to a country with a trade
deficit of 125 billion dollars. That means that the US’ trade deficit
is six times larger than the second worst! We’re not talking about a
goal photo here to determine who’s the worst offender, folks, we’re
talking about piles of money that are burning so big and fast you can
see the smoke from weather satellites!

The US is running a federal budget deficit as well, with a current
official debt running over nine trillion dollars and increasing fast.

TO YO TA
Part III: Compensating by enforcing lopsided trade terms

Towards the end of the 1970s, economists in the US administration
panicked. The Japanese cars, which flooded the market, struck at the
heart of the American pride.

Foreign cars were better than American cars from proud Detroit. This
just could not happen. Toy-o-ta. Even the name didn’t sound very
American. And yet, people in America were rejecting the pinnacle of
American engineering – cars – for a foreign-produced equivalent.

So the administration concluded quite simply that American’s dominance
in industrial production was over. Far from throwing in the towel,
another question was asked: “How can the US have a continued economic
dominance in a world where the US does not have an industrial
production of tradeable value?”

The answer came from an unexpected source.

Some time in the early 1980s, the then-CEO of Pfizer, Edmund Pratt,
was frustrated with competition from foreign companies that (quite
legally) copied and improved Pfizer’s products. At the point, however,
there was no way to change foreign laws to create a trade environment
where such competition would be outlawed.

To cut a long story short, Pratt ended up on the ACTN – the Advisory
Committee on Trade Negotiations – and recommended a plan to the
Department of Commerce that would guarantee American trade
superiority.

In short, it involved a two-pronged approach. The first part of it was
to enforce trade laws that favored American interests, and then
establishing “free trade” within that framework, set up to favor US
interests. The second part was to threaten trade sanctions against
countries that did not agree to this lopsided “free trade” agreement.

At first this was believed a risky business, since trade sanctions had
never been used as part of a systematic policy before, but only used
in exceptional cases. However, the strategy – focused on intellectual
“property”, i.e. mostly-American monopolies – turned out to work
extremely well.

A forum was sought to establish the new American trade terms as a
world standard. Pratt and ACTN went to WIPO, the UN-controlled World
Intellectual Property Organization, to seek their blessing. They were
basically thrown out on their faces, when the UN realized what they
were trying to accomplish.

So hijacking another vessel became necessary. That vessel was the
GATT, General Agreement on Tariffs and Trade.

Using a combination of unilateral threats, bilateral agreements of
“free” lopsided trade, and multilateral agreements once enough
countries had agreed to the terms, an all-encompassing and lopsided
trade agreement was devised. It would prohibit third world countries
from manufacturing medicine to save lives in their own population. It
would make sure that established players, primarily in the US, could
outmaneouver upstarts not by building better products, but through the
legal framework. The companies in the agreement, such as the record
industry, are now lobbying for warrantless searches of people’s mail
and homes to find out when their monopolies are infringed.

Using a combination of deceit and tricky negotiations, the agreement
was signed by many enough countries. That agreement is called TRIPs.
The vessel enforcing it is GATT, which was renamed World Trade
Organization, or WTO.

And that is how America came to enforce its monopolies over civil
liberties of the people in the US and elsewhere. The key takeaways
here is that America deliberately skewed international trade through a
combination of threats and coercion, in an attempt to irrelevantize
the fact that American industry didn’t produce anything sellable.

With the US now having a record trade deficit, the strategy has
ultimately failed.

(The full background to the TRIPs agreement can be found in the book
Information Feudalism. A very worthwhile, although very heavy, read.)

MONEY AS DEBT
Part IV: Understanding the monetary system

Most people, I would say it’s so “most” it can be approximated to
“all”, do not know where money comes from. How does a dollar appear?
If there is $1,000,000,000 in the total economy, who makes the
decision to change that number to $1,000,000,100?

Most people would answer “the government” or “the central bank”. This
is wrong.

The correct answer is: you do. When you borrow a hundred dollars,
those hundred dollars appear magically in the economy. They did not
exist before and will not exist after they have been repaid.

The monetary system works like this, somewhat simplified: a bank must
have a certain fraction of its outstanding loans as savings accounts.
If that fraction is 1/9 (a common number), and you deposit $1,000 in a
bank, that bank has the right to lend $9,000 to other people, at a
higher interest.

UPDATE II: the above paragraph has received a lot of comments on
various forums. To clarify: I simplified it a bit to not go into too
much detail. In the full somewhat more complex picture, the $1,000-
becomes-another-$9,000 involves a cascade of deposits in different
banks, multiplying the original limit. The first bank can only lend
$900 for the $1,000 of deposit, but those $900 becomes a deposit
somewhere else, generating another $810 in debt and magical new money,
which becomes a deposit in turn, etc, and that’s how $1,000 of deposit
generates another $9,000 of magical new shiny money in the economy. If
you’re interested, I reiterate – take 45 minutes to watch the Money As
Debt animation.

This is called the Fractional Reserve banking system. It is now doing
its third tour of the United States, introduced by President Wilson in
1913. Before that, Andrew Jackson killed the second tour in 1836.

Lately, through lobbying and obscurity, the fractional reserve
requirement has all but disappeared. Banks can now practically create
as much money as you want to borrow.

In short, while Andrew Jackson was able to remove the central
bank, he wasn’t able to eliminate unsound fractional reserve banking.
When one such unsound bank in Massachusetts collapsed, it was
discovered that its bank note circulation of $500,000 was backed by
exactly $86.48. Why is this obvious absurdity, and the banks’
protection from criminal prosecution if they suspended payments, not
called into question?

This has a number of interesting consequences. From a monetary
perspective, it means that if the interest rate is 4%, then 4% of all
credit will default, as that money must be used to pay interest on the
remaining money pool. Since every dollar in the system is borrowed,
every dollar is also owed interest on. Every single one. Where would
the money come from to pay that interest? The answer is that it
doesn’t. The system is designed so that a certain percentage of people
must go bankrupt.

Europe has had a similar system since the 1600s. If you’re interested
in more about this, I would very much recommend the 47-minute movie
Money As Debt.


http://video.google.com/videoplay?docid=-9050474362583451279

But the most important aspect is that the money supply is tightly tied
to household borrowing. If people were frugal and economical, and
everybody paid off all their debts, there would not any money left in
the economy! There would be a shortage of money, meaning that there
would not be any money to pay wages, rents, or creating new
businesses.

On the other side, the more people borrow (particularly using house
mortgages), the richer everybody feels because it increases the money
supply, without increasing actual value of goods, commodities and
services.

In 2006, this household debt was $45 trillion, compared to $5 trillion
in 1969. The money supply has been expanded ninefold.

This is significant because a collapse of the credit system means a
collapse of the money supply, and therefore create a society where
nobody will have any money.

You can see where I’m going with this with the recent subprime
mortgage market collapse, which is now snowballing.

Oh, and you’ve heard about the crash of 1929? The crash which
everybody talked about as the worst in history? That crash saw a mere
27% reduction in the money supply. Compare this with the fact that if
the US is forced into going back to a pre-1971, pre-bubble economy,
we’ll see an 89% reduction in the money supply.

To be absolutely clear: These numbers mean that in a worst case
scenario, every working citizen in the US is about to receive an 89%
pay cut on average. The best case scenario is hard to predict but I’m
betting my money that the money supply will reduce a good bit more
than the 27% of 1929.

The United States is heading for something that will make 1929 look
like just an ordinarily disturbing day with some red numbers. And its
fall will affect the rest of the Western world, as well.

CARGO CULT ECONOMICS
Part V: The fall of the dollar and of the US

Like I wrote previously, the US’ money printing machine is dependent
on the dollar being the world standard currency. It was so by legacy
even after the collapse of Bretton-Woods in 1971. No other economy was
large enough to back another currency. There was no competition for a
world standard.

Until 1999.

Since a few years back, the European Union has a larger economy than
the United States. This is according to three different sources, all
American: CIA, the World Bank, and the International Monetary Fund.

Let’s take that again, because it is a shock to many: The European
Union has a larger economy than the United States. A larger economy
with which to back its currency, the euro. Reuters reported this the
other day, but incorrectly attributed it to the decline of the dollar.
It has been true since at least 2005.

When the euro debuted in 1999, it was introduced at just above the US
dollar, but quickly fell to about .89, lower than the dollar. Today,
it is trading at 1.55 dollars per euro. Two euros is more than three
dollars.

To put fuel to the fire, the American Federal Reserve is expected to
cut interest rates on the dollar from 2.25% to 1% by mid-2008. In
contrast, the European Central Bank has been holding interest steady
at 4%.

What do the central banks’ interest rates have to do with this?

When keeping a national reserve, choosing between the dollar and euro
here is like having a choice of two different banks with different
interest rates. Everything else being equal, anybody rational would
choose the euro as savings account, because it gives a better interest
rate. But as I have already said, everything else is not equal. The
dollar is losing value quickly, too.

Many empires have overspent on their military using borrowed money,
and collapsed as a result. This was a major reason for the fall of the
Soviet Union, for instance. It is generally agreed that the
macroeconomically sustainable limit for military spending hovers
around 2% of GDP.

The US is currently spending 5% of its GDP on its military. It tops
the league of military spenders with an expenditure of 625 billion
dollars yearly. (That’s before emergency expenditures for the ongoing
war.) To hide the real numbers, only $515B are allocated to the
Pentagon openly. You need to dig deeper to discover that the funds for
building and maintaining the expensive nuclear arsenal lies with the
Department of Energy. The funds for funding and training insurgents
across the world lies with the Secretary of State. And so on.

To put this number in perspective, the world’s second largest spender
– China – spends $60 billion. About one-tenth. The total world
military spending is $1.1 trillion. This means the US spends more on
its military than the rest of the world combined.

The same U.S. military is also used to enforce the dollar bubble.

Like I said earlier, the dominance of the US depends on the dollar
being a standard currency. But with Bretton-Woods gone, the dollar’s
status as a world standard instead depends on many other things.

One of these things is oil trade.

Oil is currently – mostly – traded in dollars per barrel, which
creates a defacto dollar-based economy. A few years back, one
prominent oil producer switched to trading in euros per barrel.

This threatened the entire stability of the dollar as a world
currency, and by extension, the US’ economic bubble. After some chaos
and turmoil involving the bubble-funded US military, that particular
country is now exporting oil by the dollar again, thus once again
contributing to the dollar bubble.

That country was Iraq.

(The interpretation that the US administration invaded to protect its
currency bubble is mine and mine alone. But in this light of things,
it would have made perfect sense to do so. The alternative to spending
trillions on the war would have been risking a collapse of the entire
economy, one that now seems inevitable anyway. When I have checked
this hypothesis with Americans, though, they generally brush it off,
saying that I vastly overestimate the intelligence of the current
president.)

Today, Venezuela is trading in euros per barrel, and Iran has
announced plans to open a euro-based oil bourse in Teheran. (Yes, the
same Iran that the Republican candidate McCain is now singing about
bombing.)

In international trade, more and more agreements are being signed in
euros where anything else than dollars would have been unthinkable a
few years back. In New York, tourist shops are now brandishing “we
accept euro” signs – equally unthinkable a few years back. In
Amsterdam, most exchange offices have stopped accepting dollars for
currency altogether. It is falling so fast, they can’t resell it for
profit any longer.

In China, exporters are complaining about the cost of currency
insurance on trade deals signed in dollars, and are switching to the
euro. In Germany, Volkswagen is not selling one of its top models to
the US solely due to the falling dollar. In Tchad in Africa, people on
the streets have switched to the euro.

The thing that happens when we reach a critical tipping point – which
may already be here – and currency reserves start switching from the
dollar to the euro en masse, is that the collection agencies of the
world’s economy will come for two and a half trillion dollars of US
debt, which is currently held in stasis in currency reserves.

There is nothing that can pay these two and a half trillion dollars of
debt when the repo man comes knocking.

That tipping point will kill the dollar as a currency, sending it
plummeting to levels previously inconceivable. It will kill the dollar
as a world trade standard, the American economy, the American
military, and the United States’ status as a superpower. Just like
when the Soviet union collapsed. It is even conceivable that the
United States will fracture as a nation, just like the Soviet Union
did.

But unlike the Soviet Union, the American public will be hit hard. In
the Soviet Union, not much changed when the government-owned homes
weren’t paid for. They hadn’t been before either. Not much changed
when the food supplies were formally not coming, for they had not come
before either. People had learned to live with a malfunctioning
system. In the US, however, a lot of people will lose their homes and
might not be able to get food. This is not a recipe for a happy
society.

One prominent US economics professor recommends immediate investments
in precious metals: “gold, silver, and copper-jacketed lead”.

This difference in functionality of society before and after a
collapse is called the collapse gap. And it’s much larger in the US
than what it was in the Soviet Union, Germany, or Rome.

Final words

This is what the pirate fight is about, in my eyes. Preventing fascism
from spreading amongst corrupt administrations; defending civilization
against the systematic curtailment of civil liberties in order to
maintain a false image of prosperity and enrichen a self-serving
elite. You could even say “defending democracy”. The file sharing
debate is but the symbol, but a very powerful symbol. Like the
insignificant Belgian village of Waterloo, or the small overlooked
Pennsylvanian town named Gettysburg. They, too, were important
battlegrounds.

The US is already lost. I can think of no action that would prevent
its downfall. My fight is for Europe, which has copied every US
“intellectual property” policy in what can only be described as cargo
cult economics, and risks a similar fate.

CLOSING THE COLLAPSE GAP
http://energybulletin.net/23259.html

The USSR was better prepared for collapse than the US
BY Dmitry Orlov  /  4 Dec 2006

Good evening, ladies and gentlemen. I am not an expert or a scholar or
an activist. I am more of an eye-witness. I watched the Soviet Union
collapse, and I have tried to put my observations into a concise
message. I will leave it up to you to decide just how urgent a message
it is.

My talk tonight is about the lack of collapse-preparedness here in the
United States. I will compare it with the situation in the Soviet
Union, prior to its collapse. The rhetorical device I am going to use
is the “Collapse Gap” – to go along with the Nuclear Gap, and the
Space Gap, and various other superpower gaps that were fashionable
during the Cold War.

Slide [2] The subject of economic collapse is generally a sad one. But
I am an optimistic, cheerful sort of person, and I believe that, with
a bit of preparation, such events can be taken in stride. As you can
probably surmise, I am actually rather keen on observing economic
collapses. Perhaps when I am really old, all collapses will start
looking the same to me, but I am not at that point yet.

And this next one certainly has me intrigued. From what I’ve seen and
read, it seems that there is a fair chance that the U.S. economy will
collapse sometime within the foreseeable future. It also would seem
that we won’t be particularly well-prepared for it. As things stand,
the U.S. economy is poised to perform something like a disappearing
act. And so I am eager to put my observations of the Soviet collapse
to good use.

Slide [3] I anticipate that some people will react rather badly to
having their country compared to the USSR. I would like to assure you
that the Soviet people would have reacted similarly, had the United
States collapsed first. Feelings aside, here are two 20th century
superpowers, who wanted more or less the same things – things like
technological progress, economic growth, full employment, and world
domination – but they disagreed about the methods. And they obtained
similar results – each had a good run, intimidated the whole planet,
and kept the other scared. Each eventually went bankrupt.

Slide [4] The USA and the USSR were evenly matched in many categories,
but let me just mention four.

The Soviet manned space program is alive and well under Russian
management, and now offers first-ever space charters. The Americans
have been hitching rides on the Soyuz while their remaining spaceships
sit in the shop.

The arms race has not produced a clear winner, and that is excellent
news, because Mutual Assured Destruction remains in effect. Russia
still has more nuclear warheads than the US, and has supersonic cruise
missile technology that can penetrate any missile shield, especially a
nonexistent one.

The Jails Race once showed the Soviets with a decisive lead, thanks to
their innovative GULAG program. But they gradually fell behind, and in
the end the Jails Race has been won by the Americans, with the highest
percentage of people in jail ever.

The Hated Evil Empire Race is also finally being won by the Americans.
It’s easy now that they don’t have anyone to compete against.

Slide [5] Continuing with our list of superpower similarities, many of
the problems that sunk the Soviet Union are now endangering the United
States as well. Such as a huge, well-equipped, very expensive
military, with no clear mission, bogged down in fighting Muslim
insurgents. Such as energy shortfalls linked to peaking oil
production. Such as a persistently unfavorable trade balance,
resulting in runaway foreign debt. Add to that a delusional self-
image, an inflexible ideology, and an unresponsive political system.

Slide [6] An economic collapse is amazing to observe, and very
interesting if described accurately and in detail. A general
description tends to fall short of the mark, but let me try. An
economic arrangement can continue for quite some time after it becomes
untenable, through sheer inertia. But at some point a tide of broken
promises and invalidated assumptions sweeps it all out to sea. One
such untenable arrangement rests on the notion that it is possible to
perpetually borrow more and more money from abroad, to pay for more
and more energy imports, while the price of these imports continues to
double every few years. Free money with which to buy energy equals
free energy, and free energy does not occur in nature. This must
therefore be a transient condition. When the flow of energy snaps back
toward equilibrium, much of the US economy will be forced to shut
down.

Slide [7] I’ve described what happened to Russia in some detail in one
of my articles, which is available on SurvivingPeakOil.com. I don’t
see why what happens to the United States should be entirely
dissimilar, at least in general terms. The specifics will be
different, and we will get to them in a moment. We should certainly
expect shortages of fuel, food, medicine, and countless consumer
items, outages of electricity, gas, and water, breakdowns in
transportation systems and other infrastructure, hyperinflation,
widespread shutdowns and mass layoffs, along with a lot of despair,
confusion, violence, and lawlessness. We definitely should not expect
any grand rescue plans, innovative technology programs, or miracles of
social cohesion.

Slide [8] When faced with such developments, some people are quick to
realize what it is they have to do to survive, and start doing these
things, generally without anyone’s permission. A sort of economy
emerges, completely informal, and often semi-criminal. It revolves
around liquidating, and recycling, the remains of the old economy. It
is based on direct access to resources, and the threat of force,
rather than ownership or legal authority. People who have a problem
with this way of doing things, quickly find themselves out of the
game.

These are the generalities. Now let’s look at some specifics.

Slide [9] One important element of collapse-preparedness is making
sure that you don’t need a functioning economy to keep a roof over
your head. In the Soviet Union, all housing belonged to the
government, which made it available directly to the people. Since all
housing was also built by the government, it was only built in places
that the government could service using public transportation. After
the collapse, almost everyone managed to keep their place.

In the United States, very few people own their place of residence
free and clear, and even they need an income to pay real estate taxes.
People without an income face homelessness. When the economy
collapses, very few people will continue to have an income, so
homelessness will become rampant. Add to that the car-dependent nature
of most suburbs, and what you will get is mass migrations of homeless
people toward city centers.

Slide [10] Soviet public transportation was more or less all there
was, but there was plenty of it. There were also a few private cars,
but so few that gasoline rationing and shortages were mostly
inconsequential. All of this public infrastructure was designed to be
almost infinitely maintainable, and continued to run even as the rest
of the economy collapsed.

The population of the United States is almost entirely car-dependent,
and relies on markets that control oil import, refining, and
distribution. They also rely on continuous public investment in road
construction and repair. The cars themselves require a steady stream
of imported parts, and are not designed to last very long. When these
intricately interconnected systems stop functioning, much of the
population will find itself stranded.

Slide [11] Economic collapse affects public sector employment almost
as much as private sector employment, eventually. Because government
bureaucracies tend to be slow to act, they collapse more slowly. Also,
because state-owned enterprises tend to be inefficient, and stockpile
inventory, there is plenty of it left over, for the employees to take
home, and use in barter. Most Soviet employment was in the public
sector, and this gave people some time to think of what to do next.

Private enterprises tend to be much more efficient at many things.
Such laying off their people, shutting their doors, and liquidating
their assets. Since most employment in the United States is in the
private sector, we should expect the transition to permanent
unemployment to be quite abrupt for most people.

Slide [12] When confronting hardship, people usually fall back on
their families for support. The Soviet Union experienced chronic
housing shortages, which often resulted in three generations living
together under one roof. This didn’t make them happy, but at least

they were used to each other. The usual expectation was that they
would stick it out together, come what may.

In the United States, families tend to be atomized, spread out over
several states. They sometimes have trouble tolerating each other when
they come together for Thanksgiving, or Christmas, even during the
best of times. They might find it difficult to get along, in bad
times. There is already too much loneliness in this country, and I
doubt that economic collapse will cure it.

Slide [13] To keep evil at bay, Americans require money. In an
economic collapse, there is usually hyperinflation, which wipes out
savings. There is also rampant unemployment, which wipes out incomes.
The result is a population that is largely penniless.

In the Soviet Union, very little could be obtained for money. It was
treated as tokens rather than as wealth, and was shared among friends.
Many things – housing and transportation among them – were either free
or almost free.

Slide [14] Soviet consumer products were always an object of derision
– refrigerators that kept the house warm – and the food, and so on.
You’d be lucky if you got one at all, and it would be up to you to
make it work once you got it home. But once you got it to work, it
would become a priceless family heirloom, handed down from generation
to generation, sturdy, and almost infinitely maintainable.

In the United States, you often hear that something “is not worth
fixing.” This is enough to make a Russian see red. I once heard of an
elderly Russian who became irate when a hardware store in Boston
wouldn’t sell him replacement bedsprings: “People are throwing away
perfectly good mattresses, how am I supposed to fix them?”

Economic collapse tends to shut down both local production and
imports, and so it is vitally important that anything you own wears
out slowly, and that you can fix it yourself if it breaks. Soviet-made
stuff generally wore incredibly hard. The Chinese-made stuff you can
get around here – much less so.

Slide [15] The Soviet agricultural sector was notoriously inefficient.
Many people grew and gathered their own food even in relatively
prosperous times. There were food warehouses in every city, stocked
according to a government allocation scheme. There were very few
restaurants, and most families cooked and ate at home. Shopping was
rather labor-intensive, and involved carrying heavy loads. Sometimes
it resembled hunting – stalking that elusive piece of meat lurking
behind some store counter. So the people were well-prepared for what
came next.

In the United States, most people get their food from a supermarket,
which is supplied from far away using refrigerated diesel trucks. Many
people don’t even bother to shop and just eat fast food. When people
do cook, they rarely cook from scratch. This is all very unhealthy,
and the effect on the nation’s girth, is visible, clear across the
parking lot. A lot of the people, who just waddle to and from their
cars, seem unprepared for what comes next. If they suddenly had to
start living like the Russians, they would blow out their knees.

Slide [16] The Soviet government threw resources at immunization
programs, infectious disease control, and basic care. It directly
operated a system of state-owned clinics, hospitals, and sanatoriums.
People with fatal ailments or chronic conditions often had reason to
complain, and had to pay for private care – if they had the money.

In the United States, medicine is for profit. People seems to think
nothing of this fact. There are really very few fields of endeavor to
which Americans would deny the profit motive. The problem is, once the
economy is removed, so is the profit, along with the services it once
helped to motivate.

Slide [17] The Soviet education system was generally quite excellent.
It produced an overwhelmingly literate population and many great
specialists. The education was free at all levels, but higher
education sometimes paid a stipend, and often provided room and board.
The educational system held together quite well after the economy
collapsed. The problem was that the graduates had no jobs to look
forward to upon graduation. Many of them lost their way.

The higher education system in the United States is good at many
things – government and industrial research, team sports, vocational
training… Primary and secondary education fails to achieve in 12
years what Soviet schools generally achieved in 8. The massive scale
and expense of maintaining these institutions is likely to prove too
much for the post-collapse environment. Illiteracy is already a
problem in the United States, and we should expect it to get a lot
worse.

Slide [18] The Soviet Union did not need to import energy. The
production and distribution system faltered, but never collapsed.
Price controls kept the lights on even as hyperinflation raged.

The term “market failure” seems to fit the energy situation in the
United States. Free markets develop some pernicious characteristics
when there are shortages of key commodities. During World War II, the
United States government understood this, and successfully rationed
many things, from gasoline to bicycle parts. But that was a long time
ago. Since then, the inviolability of free markets has become an
article of faith.

Slide [19] My conclusion is that the Soviet Union was much better-
prepared for economic collapse than the United States is.

I have left out two important superpower asymmetries, because they
don’t have anything to do with collapse-preparedness. Some countries
are simply luckier than others. But I will mention them, for the sake
of completeness.

In terms of racial and ethnic composition, the United States resembles
Yugoslavia more than it resembles Russia, so we shouldn’t expect it to
be as peaceful as Russia was, following the collapse. Ethnically mixed
societies are fragile and have a tendency to explode.

In terms of religion, the Soviet Union was relatively free of
apocalyptic doomsday cults. Very few people there wished for a planet-
sized atomic fireball to herald the second coming of their savior.
This was indeed a blessing.

Slide [20] One area in which I cannot discern any Collapse Gap is
national politics. The ideologies may be different, but the blind
adherence to them couldn’t be more similar.

It is certainly more fun to watch two Capitalist parties go at each
other than just having the one Communist party to vote for. The things
they fight over in public are generally symbolic little tokens of
social policy, chosen for ease of public posturing. The Communist
party offered just one bitter pill. The two Capitalist parties offer a
choice of two placebos. The latest innovation is the photo finish
election, where each party buys 50% of the vote, and the result is
pulled out of statistical noise, like a rabbit out of a hat.

The American way of dealing with dissent and with protest is certainly
more advanced: why imprison dissidents when you can just let them
shout into the wind to their heart’s content?

The American approach to bookkeeping is more subtle and nuanced than
the Soviet. Why make a state secret of some statistic, when you can
just distort it, in obscure ways? Here’s a simple example: inflation
is “controlled” by substituting hamburger for steak, in order to
minimize increases to Social Security payments.

Slide [21] Many people expend a lot of energy protesting against their
irresponsible, unresponsive government. It seems like a terrible waste
of time, considering how ineffectual their protests are. Is it enough
of a consolation for them to be able to read about their efforts in
the foreign press? I think that they would feel better if they tuned
out the politicians, the way the politicians tune them out. It’s as
easy as turning off the television set. If they try it, they will
probably observe that nothing about their lives has changed, nothing
at all, except maybe their mood has improved. They might also find
that they have more time and energy to devote to more important
things.

Slide [22] I will now sketch out some approaches, realistic and
otherwise, to closing the Collapse Gap. My little list of approaches
might seem a bit glib, but keep in mind that this is a very difficult
problem. In fact, it’s important to keep in mind that not all problems
have solutions. I can promise you that we will not solve this problem
tonight. What I will try to do is to shed some light on it from
several angles.

Slide [23] Many people rail against the unresponsiveness and
irresponsibility of the government. They often say things like “What
is needed is…” plus the name of some big, successful government
project from the glorious past – the Marshall Plan, the Manhattan
Project, the Apollo program. But there is nothing in the history books
about a government preparing for collapse. Gorbachev’s “Perestroika”
is an example of a government trying to avert or delay collapse. It
probably helped speed it along.

Slide [24] There are some things that I would like the government to
take care of in preparation for collapse. I am particularly concerned
about all the radioactive and toxic installations, stockpiles, and
dumps. Future generations are unlikely to able to control them,
especially if global warming puts them underwater. There is enough of
this muck sitting around to kill off most of us. I am also worried
about soldiers getting stranded overseas – abandoning one’s soldiers
is among the most shameful things a country can do. Overseas military
bases should be dismantled, and the troops repatriated. I’d like to
see the huge prison population whittled away in a controlled manner,
ahead of time, instead of in a chaotic general amnesty. Lastly, I
think that this farce with debts that will never be repaid, has gone
on long enough. Wiping the slate clean will give society time to
readjust. So, you see, I am not asking for any miracles. Although, if
any of these things do get done, I would consider it a miracle.

Slide [25] A private sector solution is not impossible; just very,
very unlikely. Certain Soviet state enterprises were basically states
within states. They controlled what amounted to an entire economic
system, and could go on even without the larger economy. They kept to
this arrangement even after they were privatized. They drove Western
management consultants mad, with their endless kindergartens,
retirement homes, laundries, and free clinics. These weren’t part of
their core competency, you see. They needed to divest and to
streamline their operations. The Western management gurus overlooked
the most important thing: the core competency of these enterprises lay
in their ability to survive economic collapse. Maybe the young
geniuses at Google can wrap their heads around this one, but I doubt
that their stockholders will.

Slide [26] It’s important to understand that the Soviet Union achieved
collapse-preparedness inadvertently, and not because of the success of
some crash program. Economic collapse has a way of turning economic
negatives into positives. The last thing we want is a perfectly
functioning, growing, prosperous economy that suddenly collapses one
day, and leaves everybody in the lurch. It is not necessary for us to
embrace the tenets of command economy and central planning to match
the Soviet lackluster performance in this area. We have our own
methods, that are working almost as well. I call them “boondoggles.”
They are solutions to problems that cause more problems than they
solve.

Just look around you, and you will see boondoggles sprouting up
everywhere, in every field of endeavor: we have military boondoggles
like Iraq, financial boondoggles like the doomed retirement system,
medical boondoggles like private health insurance, legal boondoggles
like the intellectual property system. The combined weight of all
these boondoggles is slowly but surely pushing us all down. If it
pushes us down far enough, then economic collapse, when it arrives,
will be like falling out of a ground floor window. We just have to
help this process along, or at least not interfere with it. So if
somebody comes to you and says “I want to make a boondoggle that runs
on hydrogen” – by all means encourage him! It’s not as good as a
boondoggle that burns money directly, but it’s a step in the right
direction.

Slide [27] Certain types of mainstream economic behavior are not
prudent on a personal level, and are also counterproductive to
bridging the Collapse Gap. Any behavior that might result in continued
economic growth and prosperity is counterproductive: the higher you
jump, the harder you land. It is traumatic to go from having a big
retirement fund to having no retirement fund because of a market
crash. It is also traumatic to go from a high income to little or no
income. If, on top of that, you have kept yourself incredibly busy,
and suddenly have nothing to do, then you will really be in rough
shape.

Economic collapse is about the worst possible time for someone to
suffer a nervous breakdown, yet this is what often happens. The people
who are most at risk psychologically are successful middle-aged men.
When their career is suddenly over, their savings are gone, and their
property worthless, much of their sense of self-worth is gone as well.
They tend to drink themselves to death and commit suicide in
disproportionate numbers. Since they tend to be the most experienced
and capable people, this is a staggering loss to society.

If the economy, and your place within it, is really important to you,
you will be really hurt when it goes away. You can cultivate an
attitude of studied indifference, but it has to be more than just a
conceit. You have to develop the lifestyle and the habits and the
physical stamina to back it up. It takes a lot of creativity and
effort to put together a fulfilling existence on the margins of
society. After the collapse, these margins may turn out to be some of
the best places to live.

Slide [28] I hope that I didn’t make it sound as if the Soviet
collapse was a walk in the park, because it was really quite awful in
many ways. The point that I do want to stress is that when this
economy collapses, it is bound to be much worse. Another point I would
like to stress is that collapse here is likely to be permanent. The
factors that allowed Russia and the other former Soviet republics to
recover are not present here.

In spite of all this, I believe that in every age and circumstance,
people can sometimes find not just a means and a reason to survive,
but enlightenment, fulfillment, and freedom. If we can find them even
after the economy collapses, then why not start looking for them now?

Thank you.

.
Orlov has many penetrating insights, couched in his dark humor.
Particularly striking is the strong case he makes that the peoples of
the USSR were actually better prepared for a collapse because

* they had learned to be more self-reliant
* many crucial functions (like housing and transportation) were
taken care of by the state sector which was more stable than a private
sector would have been.

Orlov’s cynicism about the possibility of intelligent government
action was probably justified in the case of the Soviet Union, but I
think it would be a tragic mistake to abandon efforts to change the
direction of the U.S. The Soviets had little chance to make democratic
institutions work. We do have that chance.

UPDATE: Dmitri Orlov writes on March 4, 2007: You wrote that “The
Soviets had little chance to make democratic institutions work.”
That’s not entirely true. Perestroika and Glasnost were all about
democracy, and in my opinion it had the same chance of success as the
hopelessly gerrymandered system that passes for democracy in the US,
(although much less than any proper, modern democracy, in which the
Bush regime would have been put out of power quite a while ago, after
a simple parliamentary vote of no confidence and early elections). The
problem is that, in a collapse scenario, democracy is the least
effective system of government one can possibly think of (think
Weimar, or the Russian Interim Government) – a topic I cover in Post-
Soviet Lessons.

Lastly, I don’t think calling me a cynic is exactly accurate: I’ve
been in the US a long time, watching the system become progressively
more dysfunctional with each passing political season. It seems to me
that it is not necessarily cynical to be able to spot a solid trend,
but that it could be simply observant.